Japan: Global financial market turbulence from US trade policies challenging BoJ’s endeavor to normalize further

The Trump administration announced on April 2nd to impose 24% tariff in Japan beyond the 10% general tariffs on all of US trading partners. Since yesterday, only the latter are in place for every country, including Japan, and except for China. While the 90 days pause that Trump has suddenly offered for negotiations have offered a temporary relief, including for global markets, it is quite clear that the level of uncertainty remains extremely high. Such uncertainty does not only stop on the real economy but also on financial variables, especially after the sell-off of US Treasuries which is extremely important for Japan as the largest holder of US Treasuries. All in all, the array of measures taken by Trump constitutes a negative shock for the Japanese economy which was recovering from last year’s manufacturing bottlenecks in the auto industry. As weaker exports are expected to reduce Japan’s GDP as much as 0.5% to +0.8% YoY in 2025, the Nikkei initially dropped by more than 10% and the Yen sharply appreciated to USDJPY=145 on the back of increasing global economic uncertainties (Chart 1).While the global tariff war has intensified (notwithstanding the recent temporary pause), Japan is clearly on the camp of no retaliation, as clearly stated by Prime Minister Ishiba. In the negotiations which start, Japan has an important position related to its large holdings of US Treasuries at a time when the supply of Treasuries is bound to increase further (especially in Q4) and the demand is volatile as has been clearly demonstrated during the past few days. Still Japan will need to find ways to reduce its trade surplus with the US (Chart 2) all the more so given Japan’s dependence on the US for its security. Although politically challenging to achieve, lower import tariffs on rice, among other commodity exports from the US, could in fact benefit Japanese consumers as rice prices surged by +80.9% YoY in February. Furthermore, larger defense expenditures to purchase equipment from the US and financial support for American military bases in Japan are expected to be at the negotiation table.Despite of the increasing global economic uncertainties, the BoJ is unlikely to give up its effort to normalize the monetary policy but the market volatility will complicate matters much more. Another reason for the BoJ to continue with its normalization of monetary policy is to gain more room to accommodate cuts in the future if needed without resourcing to the by now very controversial non-conventional monetary tools that the BoJ has resorted to in the past. The good news is that the recent domestic economic conditions support a rate hike as smaller firms began to lead higher wage hike during the spring wage negotiation but it is also true that the Trump shock is really negative.