The Trump Trade Deal: Japan Still Doesn’t Look Like A Better Opportunity

The United States and Japan struck perhaps the most meaningful trade deal since Liberation Day. The agreement comes across more as a de-escalation of tensions that have built-up over the past year as opposed to a truer effort to break down trade walls and costs. Still, it hints at a structural shift in both the economic and financial landscape of the two economies.

First, a little background on what the deal entails.

• U.S. tariffs on Japanese imports, including autos and parts, will be reduced from a threatened rate of 25% or higher down to 15%.

• Japan is pledging $550 billion in new investment in the United States. This is expected to include things, such as defense, industry and infrastructure.

• Japan will accept greater U.S. exports on things, such as autos, agriculture, rice, semiconductors and pharmaceuticals.

• The 50% steel and aluminum tariffs will remain in place for now.

For Japan, the deal is a winner. With growth rates slowing to near zero and inflation hovering around 3.5%, stagflation and a lack of action from the BoJ to handle the issue was becoming a real risk to the equity markets and the yen. This trade deal doesn’t solve those problems, but it does give the central bank a little breathing room to work with as it removes a short-term source of potential volatility.

Let’s reset what the financial markets look like post-deal and try to assess where things might head next.

Great For Japanese Automakers

In 2024, roughly ⅓ of all Japanese exports to the U.S. were automobiles, so this was always going to be one of the most impacted areas of the economy either through tariffs or trade deals.

Three of the biggest Japanese automakers - Toyota, Honda and Nissan - saw their stocks soar on news of the deal.

Trump has threatened to impose a 25% tariff on all auto imports. This deal reduces the tariff on Japanese auto imports to just 15%. It doesn’t entirely remove Japan’s disadvantage in the U.S. market, but it’s a relief that it won’t be more. Plus, the certainty around the number also helps calm nerves.

Japanese Bond Yields Remain Subdued

JGB long-term yields shot higher by nearly 10 basis points following the announcement of the deal, but are still only back to levels they were a couple weeks ago.

There could be a few factors driving yields from here.