Japanese Stocks Soar Despite Tariffs and Turmoil (Aug 2025)
EWJ and key indices in Tokyo keep climbing even as the U.S. locks in 15% reciprocal tariffs and Japan’s ruling coalition loses its upper‑house majority. Here’s what’s driving the rally—and how to trade it.
Key Takeaways
- Tariff clarity beats uncertainty: A 15% cap on U.S. tariffs for Japanese autos and many goods reduced tail‑risk and fueled a relief rally.
- Politics mattered—then faded: The coalition’s upper‑house loss dented confidence, but expectations that Prime Minister Shigeru Ishiba survives near‑term eased market angst.
- Banks benefit from a steeper curve: With the BoJ policy rate at 0.5% and long yields higher, net interest margins for major and regional banks have widened.
- Corporate reform is real: Record buybacks and cleaner balance sheets continue to re‑rate Japan Inc., offsetting external headwinds.
What Changed
Market Drivers
1) Autos: Relative Advantage
With global steel and aluminum tariffs elevated, a known 15% rate on Japanese autos reduced worst‑case scenarios. Supply chains remain flexible, and share gains in the U.S. are plausible if domestic producers face higher input costs and bottlenecks. Watch shipment guidance and North American inventory data through CQ4.
2) Banks: Steeper Curve, Fatter Margins
Japan’s upward‑tilted yield curve supports interest spreads for the megabanks and regionals. Screens to watch: Mitsubishi UFJ and Resona on earnings sensitivity to loan growth and deposit betas.
3) Currency: A Yen That Can Turn
The dollar‑yen rate (~147) is vulnerable to a policy convergence trade if the Fed eases while the BoJ nudges higher. A stronger yen trims exporters’ EPS—yet boosts real incomes and domestic demand.
4) Reform & Buybacks
Tokyo’s corporate‑governance push keeps unlocking cash hoards. Rising dividends and repurchases provide a durable bid under valuations and cushion against tariff shocks.
Sector Lens: From Industrials to the Home Front
- Autos & Parts: Look for share shifts in U.S. market segments where Japanese lineups are deep; track margin guidance given metal‑input tariffs.
- Banks & Insurers: Net‑interest margin expansion is the core story; watch credit costs and hedging of foreign bond portfolios.
- Healthcare: Under‑owned in an aging society; ideas on our radar include surgical consumables and diagnostic networks with steady pricing power.
- Domestic Services & Retail: A firmer yen would lift purchasing power; focus on operators with cost discipline and improving same‑store sales.
Yen & Rates: Path Dependence
Base case: BoJ stays gradual, with a live risk of another hike into Q4 if core inflation remains sticky. Meanwhile, the Fed’s bias to ease into slowing growth could narrow differentials and pull USD/JPY toward the low‑130s over a multi‑quarter horizon. Use currency scenarios when underwriting export EPS versus domestic cyclicals.
Governance Tailwind: The Structural Bid
Japan’s equity culture is changing—fewer cross‑shareholdings, more ROE discipline, and record buybacks. This structural bid helps explain why dips tied to tariffs or politics have been bought rather than sold in 2024–2025.
Trading Playbook (for EWJ & Single‑Names)
Event‑Driven Tactics
- Tariff headlines: Use Volatility Band and Opening Gap setups on EWJ and liquid ADRs; fade first spike into anchored VWAP if liquidity confirms.
- BoJ days: Stand by for outsized USD/JPY moves; look for confluence with prior‑day value areas on banks and exporters.
Rotation Maps
- Stronger yen path: Tilt to domestics (financials, healthcare, services); underweight pure exporters.
- Weaker yen path: Favor autos/capital goods; monitor input‑cost guidance and hedges.
Risk Management
- Size down around BoJ/Jackson Hole‑style macro windows; re‑enter on the first clean pullback with order‑flow confirmation.
- Respect currency: hedge USD/JPY exposure on exporters; track basis between local shares and ADRs/ETFs.
Disclaimer: For educational purposes only; not investment advice. Trading involves risk.