The World Watches as Japan Sets Pace on Trade Talks

U.S.-China relations have dominated the trade-war conversation. But today, I’d like to take a look at how the tariff tantrum is affecting Japan.

Japan has slipped a slot to the world’s fourth-largest economy, now behind not only the United States and China but also Germany. But it remains an Asian powerhouse, and arguably the most-important U.S. ally in the region.

So Japan has been shocked to see itself threatened with an added tariff of 24%. This is so far from reciprocal as to be ridiculous, since Japan charges an average tariff of 3.7% on U.S. imports, a rate that falls to 1.9% if you use the trade-weighted average to account for the volume of goods.

National Crisis

Japanese Prime Minister Shigeru Ishiba said the threat of a 24% blanket tariff on Japanese goods is causing a “national crisis,” one that sent banking and exporter stocks into a tailspin.

There has been shocking volatility on the Tokyo Stock Exchange for a major equity market. After the initial Rose Garden presentation, the Topix sank 7.8% on April 7, clawed back 6.3% when the Trump team said Japan would get priority in trade talks, fell another 3.4% since tariffs were going into effect anyway, then rallied 8.1% during the massive runup in global stocks last Thursday.

Tokyo stocks are rallying Thursday after U.S. President Donald Trump declared “big progress” in tariff talks with a Japanese delegation. Trump had not originally been due to take part in the trade talks, but joined the U.S. secretaries of the Treasury and Commerce in meeting with a Japanese team led by chief tariff negotiator Ryosei Akazawa.

Akazawa, a close aide to Ishiba, was hand-picked by his prime minister to be point man on U.S. trade talks. Akazawa, who has an MBA from Cornell, is already the minister for economic and fiscal policy.

Today’s Market Moves

The “big progress” post has lifted the blue-chip Nikkei 225 1.4% Thursday, with the broad-market Topix up 1.3%. Both are down substantially this year, with the Nikkei off 12.5% given its heavy influence from major multinationals. The Topix, skewed a little more domestically, is down 8.2% in 2025.

By contrast, the Hong Kong market has not suffered nearly as much as you would expect this year if we are in the early stages of a serious trade war. The Hang Seng index is still up 9.0% on the year, indicating international investors both do not believe a trade war will truly develop, and that China will not be particularly hurt if it does.

Negotiations 'Not Easy'

The markets tell us Japan will be hurt by what’s currently in place. While the harshest 24% tariffs are suspended for 90 days, Japan is nevertheless contending with the blanket 10% U.S. tariff slapped on all trading partners. And there’s also a 25% import tax on car imports into the United States, as well as a 25% duty on imported steel and aluminum.

That brings the tariff for Japan’s massive automakers to 27.5%, hurting an industry that accounts for nearly 30% of Japan’s imports into the United States, in terms of 2024 value.

There hasn’t been immediate progress on Japanese tariffs, but other nations are watching carefully since the country is the first to begin detailed negotiations on a trade deal.

Ishiba, who sounded a little desperate when the 24% tariff was first declared, still says that he wants to travel to the United States to meet Trump “at the most appropriate time.” He perhaps would have attended had he known Trump would pop his head in to Wednesday’s meeting …

“While negotiations from now will not be easy, President Trump said he prioritizes negotiating with Japan,” Ishiba told reporters after a briefing on the talks, according to Kyodo news service. Japan is striving for a “comprehensive agreement” on trade “at the earliest possible date.”

Japan and China Treatment

In terms of Asia, we do therefore have the United States starting to identify allies, frenemies and rivals. Japan certainly falls in the first camp, and China at the other end of the spectrum. Other Asian countries are carefully watching U.S. talks with Japan and even potentially with China for guidance.

I said in my last column that I believe Trump is hoping to strike a “Phase Two” trade with China. That’s been given credence by the curious subsequent declaration from the White House, a little like a dating partner getting ghosted, that China really ought to call more often, and get a trade deal going.

That makes China stocks an aggressive play. But the situation is extremely volatile, and there’s no guarantee talks will start, see any success, and not fall apart.

Japan seems a far safer bet to see success on a trade deal.

The largest Japan-focused exchange-traded fund on U.S. markets, the iShares MSCI Japan ETF EWJ, is down only 0.3% in 2025. Investors are benefiting from the strengthening yen, offsetting the overall decline in Tokyo stocks.

Since exporters have been hit particularly hard, Japan ETFs have fared better if they have a stronger domestic element. The WisdomTree Japan SmallCap Dividend Fund DFJ is up 5.4% year to date, with the iShares MSCI Japan Small Cap ETF SCJ up 5.1%.

Time for Unhedged Exposure

A note on the currency. In a spell of pronounced U.S. dollar weakness, there’s a case to be investing into unhedged exchange-traded funds at the moment. The yen has been the outlier demonstrating pronounced weakness against the greenback, essentially since early 2022, so it’s also the major currency that has shown the greatest gains.

Unhedged investors into Japan are benefitting this year from a 9.2% bounce in the yen vs. the dollar, and an 11.6% gain from its weakest point last July. Since then, the yen has rallied from ¥161.60 to the U.S. dollar to a current level of ¥142.82, with every indication that the Japanese currency will continue the run.

Hedged ETFs into Japan are accurately reflecting the broad stock weakness in Tokyo. The WisdomTree Japan Hedged Equity Fund DXJ, for instance, is down 9.0% in 2025. I’d normally recommend such hedged ETFs but now is not the time.

We should watch once the currency reaches ¥140, which it did last September. It never broke through that resistance, despite the central Bank of Japan switching to a stance where it is tightening interest rates ever so slightly, and moving away from the period of “free money” with negative interest rates that the BOJ began in 2016.

A Note on the Easter Break

Markets are already closed Thursday for Maundy Thursday in the Philippines, where Easter is a very big deal indeed, arguably a bigger celebration than at Christmas in the majority Catholic nation.

In the Asia Pacific region, there’s a market holiday for Good Friday in Australia, Hong Kong, India, Indonesia, New Zealand, the Philippines, Singapore and Sri Lanka. Trading resumes on Monday for India, Indonesia and the Philippines, while the other markets I mentioned are also closed for Easter itself.

So we will have the unusual situation that markets in mainland China will be trading, but closed in Hong Kong. That may make for a volatile Tuesday’s trade in Hong Kong when the market kicks back into gear after the long weekend.