Economists at Morgan Stanley MUFG Securities are worried about new U.S. tariffs on Japanese imports. Starting August 1, a 25% tariff will be implemented, which is higher than the 24% tariff that began in April, unless a new trade deal is made. Extended tariffs could harm Japan’s economy by lowering exports and reducing investment. There’s also a chance of new financial aid, with a support package possibly announced in the autumn after the Upper House election. We see the rise in trade tensions as a serious challenge for Japan’s export-focused industries. Markets didn’t fully take into account the lasting nature of previous tariffs, and there’s now a risk of escalation that could affect broader investor interest. Since semiconductor products and auto parts are on the tariff list, we expect more short-term fluctuations in import-export balances. This impact is not just a theory. Capital flows respond quickly to external events, often causing sudden price changes instead of slow adjustments. If policymakers continue to be cautious, funding spreads may widen. There are no clear signs of easing yet, so short-term hedging will likely stay high. Miyake’s prediction of a fiscal package suggests a move towards stabilizing the domestic economy. This could support the yen in the short term. If the government reveals its spending plans soon after the Upper House vote, markets might react by adjusting their curve, especially for the two-to-five-year area. Foreign exchange traders should watch for unexpected shifts in USD/JPY positions. With Japanese policymakers being more reactive than proactive, if the tariffs go into effect without countermeasures, the yen may attract defensive flows, even if the Bank of Japan’s (BoJ) statements temper this. This situation decreases the appeal of carry trades, affecting volatility pricing. Yamamoto’s belief that exports will decline due to weaker investment adds another factor for us to consider in equity index models. Companies heavily reliant on manufacturing, especially those with significant exposure to North America, could struggle compared to regional competitors. The short interest in Japan-related indices may increase, especially if upcoming earnings show even slight downgrades. In the near term, volatility traders need to closely monitor negotiations. Failures in trade talks usually affect S&P futures faster than Nikkei-linked contracts, creating brief opportunities for arbitrage but also increasing the need for vigilance regarding news about U.S.-Japan discussions. On the fiscal front, while no specific amount was mentioned, past autumn stimulus measures ranged from 2% to 3% of GDP. If a figure in this range is confirmed, it could shift duration risk and adjust derivative trades on Japanese Government Bonds (JGB) swaps, especially in the mid-term. In the meantime, watch for imbalances in forward positions; selling pressure driven by market momentum may amplify initial reactions to any policy hints.

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