Japan Equity Strategy & Thematic Research_Trump tariff policy and Japanese stocks_ Can Japanese stocks catch up_

Summary of Japan Equity Strategy & Thematic Research Industry and Company Focus - Industry: Japanese Stock Market - Company: UBS Securities Japan Co., Ltd. Key Points and Arguments 1. Impact of US Tariff Policy: - US President Trump signed executive orders for increased tariffs on imports from Mexico, Canada, and China, with additional tariffs on steel and aluminum products. Japan's steel and aluminum exports to the US are only 0.05% of GDP, indicating minimal impact from these tariffs [1][9][10]. - Japan's average tariff rate is 3.7%, comparable to the US's 3.3%, suggesting that Japan may not be significantly affected by the tariff policies [10]. 2. Japanese Stock Performance: - The TOPIX index has been flat year-to-date, underperforming major European, US, and Asian stock indices. This underperformance may reflect excessive pessimism regarding the impact of US tariffs [3][17][18]. - Corporate earnings are on track, and the negative assessments regarding US tariffs may be overly pessimistic [3][17]. 3. Sector-Specific Concerns: - Export sectors, particularly autos and machinery, are likely to be affected by global economic impacts of tariffs and non-tariff barriers [4][24]. - Trading houses, wholesalers, and automobiles have shown noticeable underperformance, indicating reliance on overseas demand [17]. 4. Domestic Demand Drivers: - An inflationary shift due to Japan-specific wage increases and corporate reforms may drive Japanese stocks. The results of the Shunto (spring wage negotiations) in March and corporate reform trends ahead of full-year earnings results in May are expected to act as catalysts [24][25]. 5. Market Sentiment and Expectations: - The analysis indicates that the impact of US tariff policy is not directly reflected in the market, while inflation expectations have peaked, and interest rate drivers have increased [25]. - There is potential for sector rotation from overseas demand-related sectors to domestic demand-driven sectors, suggesting a shift in investment focus [30]. Other Important Insights - Global Context: For European and Chinese stocks, factors such as a potential ceasefire in Ukraine and AI-related expectations are currently more influential than tariff concerns [24]. - Crowding Scores: UBS crowding scores for Japanese stocks have shown slight recovery after a decline, indicating potential shifts in investor sentiment [29]. This comprehensive analysis highlights the resilience of the Japanese stock market amidst global tariff challenges, emphasizing the importance of domestic demand and corporate reforms as key drivers for future performance.