A recent Reuters survey shows that 71% of Japanese companies believe the impact of U.S. tariffs is as they expected. Even with a possible 24% tariff on certain goods and a current 25% tariff on automobiles, 84% of these companies are continuing with their investment plans. Many companies are taking a long-term view, considering the limited time of the Trump administration. They report stable business strategies despite ongoing trade tensions. Domestically, six out of ten firms support reducing the sales tax in response to rising inflation and the upcoming July upper house election in Japan. However, nearly two-thirds of these firms are against funding the tax cut by issuing government bonds due to worries about Japan’s ageing population and increasing social security costs. The current sales tax rate is 10%, with a lower 8% rate for food and newspapers. The report highlights how major Japanese firms are handling challenges both from abroad and at home. Most companies are looking beyond the immediate discussions about U.S. tariffs. Even with high duties on certain goods, particularly auto exports, business leaders seem unfazed. About 75% are sticking to their investment plans, indicating a longer-term perspective rather than a short-term reaction. The note about the duration of a U.S. president’s term suggests that companies are anticipating changes and adjusting their strategies accordingly. On domestic issues, rising prices are affecting consumer sentiment as elections approach. Many companies believe that lowering the sales tax could provide relief for voters. However, they are also strongly opposed to increasing national borrowing to fund this, fearing long-term financial strain as Japan’s population ages and demands for social services rise. Thus, while companies support temporary consumption relief, they prefer not to fund it through debt that could worsen future obligations. For those monitoring how policies and sentiment affect the market, corporate behavior remains steady despite increased tariffs abroad. This indicates that pricing models focusing heavily on external political risks may need adjustment. Instead of relying on immediate volatility from tariffs, we should consider scenarios that emphasize resilience and stability. If companies are firm on their investment plans, the risk of a downturn could be less severe. On the fiscal policy front, changes to the national sales tax could quickly shift consumption patterns, especially in online retail and stock turnover. These impacts often go unnoticed in broader economic reports but can significantly affect short-term hedges and retail-related investments. If discussions about tax cuts accelerate, we should keep a close eye on monthly updates of consumer spending. Along with election messaging, this might show early signs of changes in sentiment—not through government bond yields, but through household spending. We also need to watch for changes in fiscal strategies. If authorities lean towards non-debt options, like cutting spending or using reserves, this could constrain stimulus efforts. Such moves would alter our expectations for economic growth. Given that corporate leaders are already concerned about debt, any shift away from bond issuance should be closely monitored. While these changes might not cause immediate shifts, they can affect fiscal credibility, which longer-term financial instruments are sensitive to. In summary, we see stability in business planning alongside caution in policy discussions. This sends a clear message: there is confidence in the current situation but with certain limitations. Reactions to current pressures may be muted this quarter, allowing for more stable implied volatility. However, we should remain alert for sharper shifts if domestic policies, like tax reforms, start to advance.

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