When it comes to Donald Trump, uncertainty is part of the package. That said, even by his own standards, the US president has caused considerable uncertainty for Japanese investors over the last few weeks – this time by way of his tariff messaging.
Initially, markets breathed a sigh of relief when Washington announced Japanese exports to America would face a flat 15% tariff rate, markedly below the 25% threatened. Days later, though, a sweeping executive order appeared to suggest this rate would be “stacked” on top of existing levies, reintroducing confusion and panic in equal measure in the market.
The clarification came quickly. US officials expressed “regret” for the miscommunication, confirmed the agreed tariff rate, and even offered to refund overpayments.
And for now, investors seem reassured – with tensions eased, the Topix has rebounded to record highs.
But is the episode over?
Trump has a track record of dramatic, last-minute policy shifts. There is no guarantee tariffs on Japanese goods won’t change again, perhaps without warning. In our view, the best way for Japanese investors to navigate this uncertainty is to focus on quality stocks with the resilience to withstand external shocks and deliver value over time.
Resilient Business Model
Whatever form US tariffs ultimately take, they will affect Japanese equities. That’s true for companies in any market globally, whether it’s the UK, Europe, or China.
The key question is: which companies will be able to absorb the disruption and protect profitability, and which will struggle?
Whether tariffs settle at 15% or escalate to 25%, we expect the best-positioned stocks to be those combining pricing power with healthy margins.
Starting with pricing power, it’s important to remember tariffs are paid by the importer, not the exporter. The US importer is therefore incentivised to demand price concessions from its Japanese supplier.
The dynamic puts relatively more pressure on Japanese companies with lower market shares. Without competitive leverage, they may be forced to cut prices significantly to retain business, or risk losing customers to domestic alternatives facing no tariffs.
By contrast, Japanese companies with high market shares have far better negotiating positions. If there are few (or even no) viable substitutes for their products buyers have little choice but to continue purchasing at pre-tariff prices.
One example is PILLAR Corporation, c.$700m market cap manufacturing company headquartered in Osaka. The company commands a global market share of >90% for their core product range; flow control components made from high performance fluororesin (PILLAR Annual Report 2024). The knowhow is in the injection moulding technology of this difficult to handle material. Within the semiconductor industry, the company states that their products are the de-facto standard and thus could be hard for a competitor to displace.
Pricing power alone, though, may not be enough.
Tariffs are arriving against a backdrop of cost and wage inflation in Japan. In this environment, the companies that will thrive are those with the ability to protect margins through operational efficiencies, cost control, or smarter allocation of capital.
Here, Japanese companies may enjoy a relative advantage.
Many American firms, for example, already operate at peak efficiency both in terms of margins and capital structure, i.e. leverage. By contrast, a significant number of Japanese companies are still at an earlier stage in their corporate governance evolution. This means there is untapped potential absorb potential cost inflation through the streamlining operations, improvement asset utilisation. This stands them in good stead to continue the long-term trend of improving shareholder returns.
For investors, the task is to identify Japanese businesses with both an operational buffer and sufficiently strong governance that signal a willingness to act in this way. Stocks showing progress on these fronts can build stronger safeguards against cost pressures and turn challenges into opportunities for long-term growth.
JAFCO recently made just such a decision. The c.$1bn market cap venture capital company announced in April 2025 that it will be running down its Asia-Ex Japan businesses and reallocating the capital to its core domestic market. The businesses were not loss making, but it is a case of optimisation of capital allocation; in their view, and we are in agreement, the Japanese venture capital opportunity is more compelling than many other geographies.
Positioning for the Long-Term
The US-Japan tariff situation remains fluid, and policy direction can change abruptly. But by focusing on quality companies with pricing power and the ability to defend margins, Japanese investors can position themselves to ride out short-term volatility and capture long-term returns.
These attributes are valuable in any conditions in any market globally. In a world where trade policies can shift overnight, they’re indispensable.
By Theo Wyld, Portfolio Manager on the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust plc
