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Last week, uncertainty clouded the markets, as noted by the head of trading at a brokerage in Tokyo. The financial world was teetering on the edge, trying to decipher whether Donald Trump’s threats of tariffs were genuine or simply a high-stakes negotiation tactic. Would there be sudden breakthroughs that neutralized the threats, or were we witnessing the unraveling of the global trading system?
Over the weekend, when China responded with tariffs of its own and Trump doubled down by branding the chaos as “medicine,” the markets began to sense that this was indeed serious. By Monday, Tokyo observed a steep drop of over 9% in its stock market at the open, indicating that the threat was being taken at face value.
Analysts found Monday’s sell-off in Tokyo and Asia particularly disconcerting due to its calculated nature. This wasn’t a knee-jerk reaction; it was a considered response to growing concerns.
Adding to the unease is a glance at the Dow Jones index since Trump’s presidency began in 2017: despite last week’s decline, it has risen by more than 90%. One broker questioned if Trump believes the markets could bear more pain as long as they remained positive during his tenure.
Market participants used the weekend to ponder not just tariffs but also the looming specter of a global recession and the influx of cheap Chinese goods into non-US markets. This could lead to a deflationary wave that central banks may struggle to manage.
For Japan, these issues cast significant doubt on the Bank of Japan’s ability to raise rates and normalize its monetary policy.
The severe market disruptions in Tokyo—falling stocks, declining bond yields, and significant yen volatility—underscore the complex challenges investors face across various asset classes. Many traders pointed out that much of the current turmoil has been driven by short-term money movements, while the possible impact from long-only global funds remains untested.
A Tokyo-based asset manager remarked on the binary nature of the situation, highlighting the lack of clarity about which path might prevail. Markets appear to be finally recognizing that Trump’s intentions are singularly his own, shrinking the universe of market sources to a single unpredictable voice.
“If these tariffs stay,” the manager commented, “it’s not too late to offload stocks. But if there’s a reversal, the market could rebound dramatically. Navigating between these starkly different potential outcomes is incredibly challenging.”
For years, Tokyo equity brokers believed that buying during downturns was a sound strategy. Historically, market upheavals often presented opportunities, with recoveries just around the corner. The real risk lay in missing the upswing.
However, Trump’s policies may have altered enough to put this approach into question. While deals over tariffs are possible, Japan serves as a case study for the high hurdles to be cleared. As America’s closest Asian ally and its largest direct investor, Japan now finds itself portrayed as a plunderer, denied any respite from a harsh 24% tariff.
On Monday, Prime Minister Shigeru Ishiba acknowledged in parliament that while Japan hopes for tariff relief, it must brace for the possibility of needing to rely on domestic stimulus measures instead.
If Ishiba is correct, investors worldwide might face significant repositioning in the near future.
