The Trump administration’s second term has been marked by a renewed emphasis on bilateral trade deals, economic nationalism, and strategic use of tariffs as a tool of leverage. While the administration has signalled a desire for “quick wins” with key partners such as Japan, the underlying uncertainty surrounding the permanence and scope of tariffs remains a central concern.

The administration’s transactional approach to trade has placed Japan in a delicate position — balancing its economic interests with its strategic alliance with the US and its geographic proximity to China. Japan’s ability to navigate this strategic dilemma — leveraging its alliances while preserving economic autonomy — will shape its investment landscape for years to come.

Japan's average tariff rate does remain among the world’s lowest, highlighting the potential for productive negotiations amid rising trade war fears. 

In recent years, Japan has emerged as a free trade powerhouse, with agreements such as JEFTA (Japan-EU Free Trade Agreement), CPTPP (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and RCEP (Regional Comprehensive Economic Partnership). It also struck trade and digital agreements with the US during Trump 1.0, and as the countries thrash out a tariff deal, they continue to collaborate in areas such as 5G networks, space exploration and medical research.

This paper explores how Japan’s macroeconomic outlook and asset class dynamics are being influenced by the resurgence of Trump-era tariffs and why Japanese equities could still provide attractive opportunities to investors.

The Japanese equity market is currently navigating a lot of turbulence, with global trade uncertainty, currency fluctuations, and recession risks all weighing on sentiment. However, Japan’s proactive diplomatic stance could help its markets rebound faster than others. Additionally, Japanese equities offer a compelling mix of low valuations, strong balance sheets, and structural reform momentum. These factors provide a buffer against global shocks and support long-term profitability.

From a style perspective, while value stocks have dominated in recent years, we believe the market may be on the verge of a rotation toward those quality and growth stocks, as investors increasingly prioritise stability in an unpredictable global environment.