Hot Topix: Japan Trade Deal Fires Up Key Index, But for How Long?

The Topix is cresting to a record high in Tokyo trade today, the follow-through from Japan finally inking an agreement on tariffs with the Trump administration.

The Topix ended Thursday with a 1.8% gain, adding to the 3.2% jump on Wednesday. The Topix – Tokyo Stock Price Index in full – touched a record 2,986.63 during today’s trade, and finished not far off that at 2,977.55.

The Nikkei 225 has strong positive momentum of its own, crossing the 42,000 mark for the first time since it set an all-time high of its own in July 2024.

The nudge Tokyo needs?

It’s been a trying year for Japanese equities, which had been treading water due to their high exposure to global trade. But the Tokyo market is benefiting from a hard outcome after eight rounds of negotiations in Washington.

The Topix is now up 8.0% for the year, five of those percentage points coming in the last two days. The blue-chip Nikkei 225 had been only just in positive territory but is now up 6.4% in 2025, still held back slightly by geopolitical concerns that could yet disrupt business for its large multinational listings.

While the Topix represents all stocks in the prime, standard and growth markets on the Tokyo Stock Exchange, the Nikkei 225 tracks large caps in Tokyo. So the Topix has a greater domestic weighting.

Japan generates 21.9% of its economy from exports, a higher proportion than China’s 20.0%, according to World Bank data. So it has removed a major overhang that Tokyo, expected to be first in line among U.S. allies on trade, has finally struck a U.S. trade deal.

We could therefore see Japanese stocks sustain positive momentum. Japanese companies now have a competitive edge over most international rivals.

Enough to spare Japan’s leader?

As ever, we are relying on piecemeal details of the deal rather than the exact text. Even embattled Japanese Prime Minister Shigeru Ishiba initially said he would “receive a report on the details in the future and examine them carefully” when word of the deal broke on Wednesday, Asia time.

Ishiba is a lot more bullish today. “We obtained the largest reduction among countries that have trade surpluses with the United States,” he said, according to Kyodo news agency. “This is a great achievement.”

Will this deal save Ishiba? The prime minister faces calls to resign even from within his own party, as I noted in my last column, after a disastrous election on Sunday. The results mean Ishiba’s Liberal Democratic Party (LDP) have lost majorities in both the Upper and Lower House of Japan’s government, leaving them requiring coalition partners to pass legislation.

Ishiba likely still doesn’t have long in his post. Actually, he had cited the trade negotiations as a key reason why he should remain prime minister. So while he will champion this success, the impetus to offer continuity is gone.

Scant details of the deal

Japan has secured a 15% tariff rate on its exports into the United States, a rate that extends to the key automobile industry. Tokyo, meanwhile, has agreed to form a fund that will provide a massive $550 billion war chest in loans and guarantees to Japanese companies investing into the United States.

Japan will increase the amount of U.S. rice it imports within its tariff-free quota of around 770,000 tons per year, with U.S. rice making up half the tally in 2024. But Ishiba says the deal doesn’t include any reduction of Japanese tariffs, including on farm goods.

Rice is a symbolic crop in Japan, a daily staple and an industry that has a powerful lobbying force on the LDP. 

Likewise, autos capture the American imagination in terms of manufacturing. The United States imposed a blanket 25% tariff on auto imports in April, on top of an existing 2.5% tariff.

Car stocks soar

Japanese car companies now benefit from a flat 15% tariff that includes the existing 2.5%. U.S. auto industry bodies aren’t happy with that, noting that tariffs on parts from Canada and Mexico remain at 25%. The upshot is that a Japanese import benefits from a lower rate than a U.S.-assembled car with parts from elsewhere in North America.

It’s stocks like Mazda Motor MZDAY (T:7261), up 19.5%, that are leading the Japan rally, given their smaller proportion of U.S. production. Likewise, Subaru FUJHY (T:7270) shares are also up 18.9% on the trade deal, given its greater emphasis on exports from Japan.

Gains are strong but more tempered for the companies with large U.S. factories such as Toyota Motor TM (T:7203), with its stock up 14.1%, Mitsubishi Motors MMTOY (T:7211) up 13.4%, and Honda Motor HMC (T:7267) up 10.9% since Tuesday’s close.

Nissan Motor NSANY (T:7201) has added “just” 9.1%, since it’s been losing market share in both the United States and China.

Tariffs still up massively

Let’s be clear. U.S. tariffs will be increasing, massively. The average U.S. tariff stood at 2.5% last year, according to Statista, but will now rise precipitously to levels not seen since World War II.

Nomura has just raised its assumptions to an average U.S. tariff of around 19.5%, up from 15.2%. That creates inflationary pressure in the United States, and disruption for overseas suppliers trading with U.S. partners.

The import duties will force someone, somewhere along the supply chain to swallow price hikes, with the immediate duties paid to U.S. customs by the recipient company importing the goods. Ultimately, the U.S. consumer will pay the price, not foreign governments.

Japan has secured one of the lowest rates on trade. Trump said on Wednesday that countries would face tariff rates of 15% to 50%, which are waaaaaaay above what they were, and in no way reciprocal whatsoever.

Both Tokyo and Washington were very keen to push a Japan deal over the line before the current Aug. 1 deadline for higher tariffs to go into effect.

“We’ll have a straight, simple tariff of anywhere between 15% and 50%,” Trump said at a conference on Wednesday. “We have 50% because we haven’t been getting along with those countries too well.”

The president had previously said the low end on tariffs would be 10%. That’s a rate the United Kingdom has struck on U.S. car exports, though the number of vehicles is capped at 100,000 per year, roughly the number of Range Rovers and Rolls Royces sent stateside annually by U.K. car companies.

How firm are these 'deals'?

Even the “deals” announced by Trump so far may not stick. He announced that Vietnam would face a 20% tariff on U.S. exports, and a 40% tariff on transshipments to cut off rerouting from China. But the Hanoi government was surprised by that announcement, which I indicated at the time could be seen as a setback, and is still hoping to talk those figures down.

The Philippines on Tuesday secured a 19% tariff rate as President Ferdinand Marcos Jr. became the first Southeast Asian nation to meet Trump in person in his second term. That matches Indonesia, and is of course slightly better than the 20% for Vietnam.

“One percent might seem like a very small concession,” Marcos said at a news conference. “However, when you put it in real terms, it is a significant achievement.” But it is worse than the 17% rate first announced in April when Trump waved his Rose Garden tariff chart around.

The Manila stock market is up a narrow 2.2% this week. But that still leaves Philippines stocks down 1.6% on the year.

Most of the trade “deals” are nothing of the sort, just a framework and basis for future talks. They don’t compare to the U.K.-India trade deal that Indian leader Narendra Modi has just flown to London to cement. That agreement between the world No. 5 and No. 6 economies took three years to negotiate.

South Korea and Europe look to be in line to strike some kind of U.S. agreement before Aug. 1. But there’s likely more that could go wrong than can go right.

Meantime, Japan’s agreement is more specific than most. It leaves the world No. 4 economy with a flat tariff across the board that Trump now says is his bottom tariff line. Japanese companies, and Japanese equities, should continue to benefit from the greater certainty.

At the time of publication, Alex Frew McMillan had no position in any security mentioned.