Tariffs, What Tariffs? In Japan, It's All About the Price of Rice

I’m currently traveling on a short trip to Japan. I’m down in the very south of the country, in Okinawa Prefecture, on an island called Ishigaki.

It’s one of the southernmost points in the country, far closer to Taiwan (about 160 miles to the west) than even the main island of Okinawa (250 miles away). Tokyo is a distant 1,200 miles north.

Still, Tokyo calls, in the form of the loud speakers I hear on the boxy little kei car driving by, election placards on the side. There are Upper House elections in 10 days. Half of the 248-seat Japanese House of Councillors, roughly equivalent to the U.S. senate, will change hands. Once elected, they’ll be there for a while, with six-year terms.

While I do hear the election sloganeering, what I don’t hear is any talk about geopolitics, tariffs or trade. Japan is struggling to strike a tariff framework with the United States – its trade team has left Washington seven times, empty-handed – in a situation that Prime Minister Shigeru Ishiba has called a “national crisis.” But all politics is local, as they say, and voters appear far more concerned about how much they pay at the cash register.

East Asian Markets Still Higher This Year

As a columnist who covers Asian markets, I tend to focus on potential market-moving events like the threat, delivered on Monday, of 25% tariffs across the board on Japanese imports into the United States. Both Japan and South Korea, key U.S. allies in the Pacific, face the same fate.

This week, Japanese stocks have tended to move higher until today. The Topix was dented to the tune of 0.6% on Thursday, although the exporter-heavy Nikkei 225 fared slightly better, down 0.4%. And the broad Tokyo market is also down just the 0.6% since its close last Friday, although it’s also little changed for the year, up 2.0%.

Investors appear in stasis about Japanese stocks. Korean markets continue to charge higher, with the Kospi closing up 1.6% today. That gives it a 4.3% lift since last Friday’s close, and since a White House letter threatening higher tariffs hit Korea’s door.

South Korean stocks are this year’s star performer in Asia, with the Kospi up 32.7% year to date. That lifts the index close to its all-time highs set in the pandemic runup in mid-2021. Its high close came on July 21, 2021, at 3,303, so we’re not there yet, at 3,183. But a new all-time record approaches.

Outside of the April tariff tantrum, which sent stocks globally into a tailspin, Asian markets have focused on local issues rather than global trade. Most of the gains in South Korea have come because, with a newly elected president, a period of political turmoil that saw a failed declaration of martial law has come to a close.

Korea Taking a Page From Tokyo’s Book

South Korea is also trying to mimic the Tokyo market in forcing reform on its recalcitrant conglomerates. Korean chaebol have long been run for the benefit of their founding families, with sweetheart mergers and debt issuance often generating a windfall for, for instance, the Lee family at Samsung, the Chung family at Hyundai, or the Shin family at Lotte Group, at the expense of minority shareholders.

That may be about to change. The new government under Pres. Lee Jae-myung, who was elected in June and immediately took office, is championing the Commercial Act, with revised portions of the law passed through this time last week. The main aim is to emphasize the “duty of loyalty to shareholders” that has so often been ignored.

Japan began pushing corporate reform under the late Pres. Shinzo Abe, with a degree of success. Now South Korea would like to eliminate the “Korea discount” that sees Seoul shares trade at a price-earnings multiple that is some 30% lower than regional counterparts.

Weak market supervision and toothless regulators have allowed the chaebol families to orchestrate sweetheart deals through a holding-company structure. As Nomura points out in a research note, “the Commercial Act revision is just a starting point for more detailed legal revisions, as many legacy rules remain inconsistent with the new principle,” to protect all shareholders equally.

Japan’s reforms began in 2010, and were top-down and government-led. “In Korea, the reforms could be faster and stronger due to the power of individual investors, and the public,” the Nomura note states.

For instance, a system of a mandatory tender offer, as used in other markets, could well take hold in Korea, too. This could prevent controversial mergers such as the 2015 acquisition of the construction company Samsung C&T by another part of the Samsung empire, which minority shareholder Elliott Associates fought, as an underpriced sale.

Potential Regime Change in Japan?

I am looking for signs of weakness in the Korean market. But they have yet to appear. Likewise, the Tokyo market has not sold off heavily, even if a market heavyweight like Toyota Motor TM (T:7203) is down 17.9% this year.

It is already confirmed and in effect that U.S. auto imports carry an extra 25% duty. Rivals such as Honda Motor HMC (T:7267), down 6.0%, have also been hurt as a result. Nissan Motor NSANF (T:7201), faced with falling sales in the United States and China, must undergo an overhaul after posting disastrous results, and a 36.2% slide in share price this year.

So we can see how much a sector can suffer when targeted with tariffs. Still, for companies that are not yet confirmed to face a higher U.S. duty, life goes on as usual. Voters here in Japan would rather see a reduction in the consumption tax charged on all purchases. It’s an issue that could sway the Upper House vote on July 20.

Japanese leader Ishiba already presides over a minority government, having lost its majority in the Lower House last year. Trade relations will be back of mind, but inflation and pocket-book issues look set to determine the fate of Japan’s government. If Ishiba’s Liberal Democratic Party doesn’t win the necessary 50 seats to maintain their majority in the Upper House, Ishiba may be on his way out.

That’s what’s behind the frantic shouting out of the loudspeaker driving up and down the road outside here in Okinawa. Shoppers here face high prices for rice in the grocery store, with prices doubling compared to last year. Whether it’s eggs deciding the vote in Washington or rice deciding which way Ishigaki goes, these local issues champion geopolitical concerns when it’s time to head to the ballot box.

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