Daiwa Securities predicts that Donald Trump’s suggested 25% reciprocal tariffs on Japanese goods may cause Japan’s real GDP to drop by 1.1%. The firm’s economists expect growth for FY2025 to only be between 0.1% and 0.2%. This is a decrease from the earlier estimate of 0.8% for FY2024. The tariffs likely won’t create a major shock, but ongoing labor shortages might keep inflation high. As a result, the Bank of Japan is expected to continue its gradual interest rate increases instead of easing policies to address the slower growth.

Economic Impact Assessment

Daiwa’s economists warn that the proposed tariffs could harm Japan’s economy, leading to a 1.1% drop in real GDP if implemented as planned. They have updated their growth forecast for the next fiscal year to between 0.1% and 0.2%, a significant decline from this year’s 0.8%. While the tariffs alone may not create an immediate crisis, the long-term effects could gradually affect sectors that rely heavily on exports. This analysis also considers the tight labor market. With fewer workers available, costs might stay high, which would increase consumer prices. Even with slower growth prospects, prices are not expected to decrease significantly. Therefore, Ueda and his team are likely to keep raising interest rates. Markets should not expect any easing of policies in response to weaker growth numbers. For those analyzing derivatives, the picture is clearer. Positions related to yield volatility, especially in Japanese government bonds, may need adjustments. If the central bank does not intervene to boost growth, the yield curve may steepen. Upcoming inflation data and quarterly Tankan survey results will be significant indicators. Option pricing may change quickly as rates remain on a slow upward trend. In the stock market, attention should be on sectors that depend on foreign demand, such as manufacturing companies with connections to North America. Short-term hedges may not provide enough downside protection if trade tensions rise. On the other hand, domestic companies could present selective buying opportunities where they still have pricing power.

Future Strategy and Planning

Looking ahead, it’s wise to observe how companies adjust their capital expenditure and inventory plans. If trade issues start to affect corporate strategies in 2025, secondary effects may increase earnings volatility, especially for exporters in transport and machinery. Currency fluctuations could also become more reactive, which is important for FX futures strategies. Overall, the Bank of Japan’s cautious approach indicates that policies are being shaped by long-term conditions rather than quick fixes. Fixed income traders should take this into consideration when setting their positions and planning carry trades. Swap spreads might widen if inflation remains high relative to growth risks. This trend could continue over the next quarter. Create your live VT Markets account and start trading now.

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