Japan and the US have brokered a trade deal that bolstered markets today but some are unconvinced that the negotiations are a net benefit in the long run.
Goods and services flowing from Japan to the US will be subject to a 15% tariff, much lower than the 25% previously threatened by president Donald Trump, although higher than the 10% currently in place as the US government continues to bargain with its trading partners.
Japan has also committed to deploy more than half a trillion dollars ($550bn) in an investment fund to be used in the US, according to the US president, although details of this are unclear, as well as agreeing to open its market to US rice and cars.
Lale Akoner, global markets analyst at eToro, said: “Japan’s macro pressures, demographic decline, inflation risk and policy constraints left it little choice. The concessions made show how economic and political fragility erodes negotiating power.
“While the investment fund helps preserve market access to US capital without straining the fiscal balances in the short term, committing such a large sum to the investment fund may trigger political backlash over the long term”.
The Nikkei 225 jumped 3.5% on the news, led higher by car makers, which rallied as tariffs on automobiles and parts were dropped from 25% to 15% with no quota on the number of cars that can be sold in the US. America currently charges a 25% tariff on all cars made outside the US, so this is a reduction for Japanese manufacturers.
During the day, shares of Toyota jumped 14%, Honda rose 10%, and Nissan was up close to 8%. Mazda rose 18% to hit its daily limit imposed by the Japanese stock exchange to mitigate large moves in individual companies.
Similarly, the S&P 500 was up slightly in pre-market trading. The moves reverberated around the world, with European, UK and other Asian markets also nudging higher.
But George Lagarias, chief economist at Mazars, said there is “not much cause for long-term celebration, despite the positive initial market reaction”.
“Much higher product tariffs are not included in the deal. The number will still likely contribute to an increase in US inflation and put pressure on real growth for both countries,” he said.
“Why are the markets jubilant this morning? Because even a higher tariff is preferable to continued uncertainty. But this is hardly a catalyst for long-term optimism.”
The next stage will be to see if this deal has any impact on the European Union’s negotiations with the US – likely the next big domino to fall.
Akoner said: “We expect this outcome to resonate in Brussels. The EU is finalising its own trade deal with Washington ahead of looming 30% tariffs, particularly on autos.
“Japan’s deal suggests a pathway to de-escalation, but at a price. That’s a constructive signal for German equities and car makers, but also a warning that future US trade diplomacy may hinge less on tariffs and more on capital.”
Neil Wilson, UK investor strategist at Saxo Bank, said it would be fair to assume the latest Japan deal will have an impact on negotiations with the European bloc.
“European stock markets are taking their clues from Japan this morning, rising sharply on the hope that the Japan deal means the EU is about to achieve the same,” he said.
However, not all are convinced. Lagarias said: “If the deal with Japan is the standard by which the negotiation with the EU will go, then investors and businesses should begin to price in a deterioration of the macroeconomic backdrop.”
Wilson added that the European Union is reportedly considering whether to deploy its ‘Anti-Coercion Instrument’ should there be no trade deal by 1 August.
This would mean 30% tariffs on exports to the US – effectively killing trade between the two partners. This is the “nuclear option on the table”, although, for now, the expectation “seems to be veering towards a deal”.