Last week, the head of trading at a brokerage in Tokyo observed that markets were uncertain about the intentions behind Donald Trump’s tariff announcements. There was confusion over whether Trump was genuinely threatening tariffs or merely engaging in brinkmanship, and there was speculation about the possibility of new deals to resolve the situation. Concerns arose about the potential collapse of the global trading system.
Over the weekend, China’s retaliatory measures and Trump’s firm stance on tariffs, describing the resulting turmoil as “medicine,” indicated a more serious and genuine threat. This realization led to a significant drop in Tokyo-listed stocks, which fell by over 9 percent at the opening on Monday.
Analysts noted that Monday’s sell-off in Tokyo and across Asia seemed rational rather than driven by panic. A broker pointed out that despite the recent market downturn, the Dow Jones index had increased by over 90 percent since the beginning of Trump’s presidency in 2017. This raised questions about whether Trump believed the markets could endure more difficulties as long as overall growth remained.
During the weekend, market participants contemplated the broader implications of tariffs, including the potential for a global recession and the influx of inexpensive Chinese goods into non-US markets, leading to deflationary pressures. Central banks might have limited options to mitigate the damage.
In Japan, these concerns cast doubt on the central bank’s ability to raise interest rates and normalize monetary policy. The significant market turmoil in Tokyo, characterized by plummeting stocks, falling bond yields, and volatile yen movements, highlighted the complexities facing investors across asset classes. Traders pointed out that much of the global uncertainty had been driven by short-term capital, and the potential impact of long-term capital exiting risky assets had not yet been fully realized.
A Tokyo-based asset manager commented on the difficulty of navigating the current situation, which presented binary outcomes with little clarity. The financial markets were starting to recognize that Trump’s decisions were unpredictable, with him being the sole spokesperson for his policies.
The asset manager suggested that if tariffs remained at current levels, selling stocks might still be timely. Conversely, if tariffs were reversed, it could lead to a significant market rebound. Accurately positioning for these divergent outcomes was described as extremely challenging.
Historically, Tokyo equity brokers noted that buying on market dips had been a successful strategy, as past turmoil often presented buying opportunities with eventual recovery. However, Trump’s actions have cast doubt on this strategy, with Japan exemplifying the high bar set for securing tariff relief. Despite being America’s closest ally in Asia and a major investor in the US, Japan was included among those perceived as exploiting America and received no relief from the 24 percent “liberation day” tariffs.
Prime Minister Shigeru Ishiba acknowledged in parliament on Monday that Japan’s strategy might involve hoping for tariff relief while preparing for the worst through domestic stimulus efforts. Should this assessment prove correct, global investors could face significant repositioning challenges.
