The US-Japan tariff negotiations highlighted Donald Trump’s preference for bluff and bargaining over outright confrontation, creating both political unease and fresh market dynamics. In the following analysis, Edward Cartwright, CEO at Arcus Investment, discusses how the deal has reshaped geopolitical perceptions while opening up new opportunities in Japanese equities.
By Edward Cartwright, CEO at Arcus Investment
If an aggressor threatened you with a beating, and then let you off with a single punch to the nose, how would you feel? Relieved, naturally, but also wary. After all, if he had changed his mind once, what is there to stop him from doing it again? On the other hand, if you had some experience of his modus operandi, you might ask yourself why he acted that way and what he hoped to achieve.
We believe President Donald Trump wanted to demonstrate both his and America’s power but without causing serious financial and economic disruption. In other words, the negotiations were a masterclass in bluffology.
On April 2nd, he shocked the world by initiating a trade war via sky-high tariffs. Japan was particularly taken aback since it had assumed its status as America’s primary military ally in the crucial Indo-Pacific region would guarantee preferential treatment. Instead, it received the cold shoulder, with negotiator and Economic Revitalization Minister, Ryosei Akazawa travelling to Washington eight times in four months. On the final occasion, he was dismissed with a mere phone call.
If it seemed to many that Trump was playing games during negotiations, the answer was yes. The “largest deal ever made” which Trump proposed, and Japan accepted was very similar to the one agreed by the EU and the US a few days later. Similar to the professional wrestling matches Trump enjoys, this suggests the whole tariff drama had been mapped out from the start. Team Trump could well have settled on 15% tariffs in advance as “doable” for major companies in Japan and the EU. However, the series of delays and deadlines would have been there to ratchet up the tension and give the targets a false sense of accomplishment.
Trump is taking calculated risks: that Wall Street holds up, US employment remains in decent shape, his support base stays loyal, and inflation does not take off. The lower tariffs reduce these problems and so far, everything is going his way. As for the $550 billion laundry list of requirements that Trump claims are conditional on Japan’s deal, it is highly unlikely he will monitor complicated details himself, despite threatening to do so. In all likelihood, the tariff story is now over for Japan.
Unlocking value in Japan’s equities
Now the dust has settled, the US-Japan trade deal has injected fresh optimism into Japanese equities, and for European investors in particular, this presents a timely opportunity. The deal signals reduced geopolitical risk and stronger trade certainty, which enhances Japan’s appeal as a diversification play amid European economic headwinds. With hedging costs easing, euro-based investors may also find Japanese stocks more attractive on a currency-adjusted basis.
Within Japan, the deal so far has had a mixed impact across different industries. One obvious short-term beneficiary was the automotive sector, which benefited when tariffs on Japanese cars and auto parts were reduced from 25% to 15%, with no cap on export volumes. That being said, we believe the opportunity presented by Japanese car makers doesn’t lie within Trump’s less-scary tariff rate, rather that their stocks represent good value. While Japanese autos certainly have their challenges, they also have underappreciated strengths. They have strong global brands, extensive networks, and good technology, and there is often an overestimation of their financial weaknesses. Over time we have seen that when a deeply out-of-favour name sees even a small improvement in sentiment, the share price can react positively.
In contrast, Japanese steel and aluminium sectors continue to face a steep 50% US tariff, imposed for security reasons because the US Government wants to avoid reliance on foreign sources for materials vital to national defence. This places Japanese metal producers at a significant disadvantage, driving up export costs and reducing competitiveness in key markets like construction and aerospace. The lack of relief has prompted Japanese firms to explore alternative markets and consider reshoring strategies.
Despite the short-term impacts currently being witnessed, longer term, it’s nearly impossible to predict which sectors will be the true winners and losers. Nonetheless, recent market volatility offers investors a good entry point to explore the exciting, cheap investment opportunities within the Japanese market, of which there are many.
The bigger picture
Japan’s pledge to invest $550 billion into the US has raised wider questions about its commitment to Europe and the UK. While the US is a strategic priority, Japan continues to invest heavily in the UK, particularly in clean energy and infrastructure. For example, a recent £7.5 billion investment deal with Sumitomo Corporation underscores Japan’s long-term interest in UK growth sectors. In terms of Europe, Japanese direct investments are increasing by about €10 billion per year, with total investment stock reaching approximately €160 billion.
Looking back towards the US, an air of distrust lingers among Japanese citizens and decision makers alike. The cold fact is that in geopolitical terms, Japan has nowhere else to go. It has successfully kept outside the Sinosphere for 1,500 years but cannot maintain its cultural and strategic independence without its alliance with America. That alliance may be existential for Japan, but it is also pretty important for the US. Given Chinese ambitions, the US would find it difficult to remain a major player in East Asia without a well-armed and actively engaged Japan. Compared with these slow-changing realities, Donald Trump’s recent actions are a mere blink in the eye.
Edward Cartwright, CEO at Arcus Investment
