Tokyo Summit: Consumer Resilience and Trade Uncertainty in Japan - Thoughts on the Market

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Thoughts on the Market: Tokyo Summit – Consumer Resilience and Trade Uncertainty in Japan

Released on May 20, 2025

Morgan Stanley's podcast series, "Thoughts on the Market," offers insightful analyses of recent market events from diverse perspectives within the firm. In the episode titled "Tokyo Summit: Consumer Resilience and Trade Uncertainty in Japan," Principal Global Economist Chunung Lee and Equity Strategist Shonakasawa Japan delve into Japan's economic landscape amidst global growth dynamics and shifting trade relations with its two largest partners, the United States and China.

1. Introduction and Summit Context

The episode begins with Chunung Lee (A) and Shonakasawa Japan (B) welcoming listeners from the live setting of the Morgan Stanley Japan Summit in Tokyo. The discussion centers on Japan's economic positioning within the global framework, emphasizing its trade relationships and internal economic resilience.

Chunung Lee opens the conversation by stating:

"[...] we will be sharing our views on Japan in the context of global economic growth [...], focusing on Japan's position vis-à-vis its two largest trading partners, the U.S. and China." (00:13)

2. Client Concerns: Trade Policy and Governance Reforms

A significant portion of the summit's dialogue revolves around the prevailing uncertainties in US trade policies and the implications for Japan. Shonakasawa highlights that clients are particularly concerned about:

US Trade Policy Uncertainty: The unpredictable nature of US trade policies, especially under the Trump administration, remains a top concern.
Investment Strategies for Governance Reform: There's growing interest in Japan's governance reforms, notably the removal of PLNCHI listings, which involves delisting subsidiary companies from exchanges. Investors are keen to identify potential candidates for such delistings.

Shonakasawa Japan remarks:

"There are many inquiries about how to position because of the uncertainty of US Trade policy and the investment strategy for governance reform." (00:42)

3. Impact of US Tariffs on Japan and the Global Economy

Chunung Lee addresses the lingering effects of US tariffs, noting that while some tariff rates have been eased, they continue to exert pressure on both the US and global economies, including Japan.

Chunung Lee observes:

"The reciprocal tariffs have been somewhat relaxed compared to the initial announcements, they still remain very high and there was a strong focus on their negative impact on the US Economy and the global economy, including Japan." (01:21)

3.1. Domestic Demand Resilience

Despite external trade challenges, there's a consensus on the resilience of Japan's domestic demand. Investors seem optimistic about Japan's ability to sustain economic activity internally, mitigating some adverse effects of reduced external demand.

4. Global Economic Outlook and Investment Behavior

The speakers discuss the broader global economic outlook, particularly how policy uncertainties like tariffs influence investment decisions.

Chunung Lee references former Fed Chair Ben Bernanke:

"Uncertainty tends to delay investment decisions." (01:56)

While acknowledging the detrimental effects of tariffs and policy uncertainty on global trade and investment, there's a divergence in opinions regarding the sensitivity of investment behaviors to such uncertainties.

5. Detailed Analysis of US Tariffs

The discussion delves deeper into the ramifications of US tariffs on the global stage, emphasizing their pronounced impact on the US economy itself.

Chunung Lee explains:

"Tariffs essentially act as a tax burden on US consumers and businesses. [...] the more significant effect was on business, production and employment." (02:24)

Key insights include:

Inflationary Pressures: Elevated tariffs are contributing to inflation, complicating the Federal Reserve's ability to manage interest rates. The expectation is that rate cuts may be postponed until 2026 due to these pressures.
Japanese Stock Market Response: Shonakasawa discusses how Japanese equities are adjusting, with a shift towards domestically oriented sectors in response to tariff announcements.

Shonakasawa Japan states:

"Embassy's positioning have skewed sharply to domestically oriented non money shelling sectors since the US government's announcement on reciprocal tariffs on April 2." (03:18)

6. Revision of Economic Forecasts and Investment Targets

The summit participants reveal a recent revision of their economic forecasts and stock targets for Japan.

Shonakasawa Japan shares:

"We recently revised our base case topics target for end 2025 from 2000 to 2600. This revision was concealed by several key factors." (04:12)

Key Factors Behind the Revision:

Adjusted Growth Forecasts: The Japan Economics team downgraded Japan's nominal growth forecast from 3.7% to 3.3%, accounting for disruptions in supply chains and diminished growth projections for major economies like the US, China, and Europe.
Currency Valuation Shifts: The AvifX team adjusted the dollar-yen target from $1.45 to $1.35, influenced by potential deteriorations in US trade data and heightened business environment uncertainties.

Given these adjustments, Chunung Lee advises a more defensive investment stance:

"This year might be a bit challenging for Japanese equities that I recommend staying defensive positioning with defensive non marshaling sectors." (04:17-05:22)

7. Bank of Japan's Monetary Policy Outlook

A pivotal topic is the Bank of Japan's (BOJ) potential monetary policy shifts in response to ongoing economic indicators.

Chunung Lee articulates:

"If trade negotiations between the US and countries including Japan make major progress by summer, a rate hike in the fall could be a risk scenario. However, a Japan team's base case is that the policy rate will remain unchanged through 2026." (05:22)

Implications:

External Demand Dependency: Despite external challenges, domestic factors like winter bonuses and wage growth in spring are crucial for the BOJ's policy decisions.
Rate Stability: The prevailing expectation is that the BOJ will maintain its current policy rate until at least 2026, barring significant improvements in trade negotiations.

8. Japanese Yen's Performance and Sectoral Impact

The performance of the Japanese yen relative to the US dollar is analyzed for its influence on the stock market.

Shonakasawa Japan notes:

"Dollar yen is not only driver for Japanese equities. [...] our regulation model suggests a 1% higher dollar yen lifting topix 0.5% on average." (06:07)

Key Points:

Decreasing Sensitivity: Over the past decade, the yen's impact on equities has lessened due to shifts in global value chains and increased overseas production.
Sectoral Resilience: Industries driven by domestic demand, such as food, construction, and materials, demonstrate greater resilience. Additionally, sectors like transportation, logistics, and retail also show stability amidst currency fluctuations.

9. Japan-China Trade Dynamics Amid US Tariff Pressures

The conversation shifts to the intricate trade relationship between Japan and China, especially in the context of US tariff influences.

Chunung Lee addresses this complex relationship:

"Geopolitical risk remains to be a key focus [...] Japan has been taking steps such as strengthening semiconductor manufacturing and increasing defense spending." (07:08)

Insights:

Military Alliances: The Japan-US military alliance remains robust, even as Japan faces increased demands from the US.
Strategic Shifts: In response to geopolitical tensions, Japan is enhancing its domestic industries, particularly in technology and defense, to mitigate reliance on external partners.
Trade Partnership Stability: Despite US tariff pressures, the Japan-China trade partnership continues to be one of the largest globally, necessitating a multifaceted approach to navigate geopolitical and economic challenges.

10. Conclusion and Final Thoughts

As the summit concludes, the hosts emphasize the importance of staying informed and adaptive in these turbulent economic times. Chunung Lee encourages listeners to remain vigilant about ongoing trade negotiations and internal economic indicators to navigate the complexities of the Japanese market effectively.

Chunung Lee wraps up:

"I think it's time to head back to the conference. Nakaza San, thanks for taking time to talk." (07:08)

Shonakasawa Japan adds:

"Great speaking with you Lisa and thanks for listening." (07:42)

Key Takeaways

Trade Policy Uncertainty: Ongoing US trade policies continue to be a significant concern for Japan, impacting investment strategies and economic forecasts.
Domestic Resilience: Japan's strong domestic demand provides a buffer against external economic shocks, though sector-specific vulnerabilities remain.
Monetary Policy Stability: The Bank of Japan is expected to maintain its current rate until 2026, barring significant economic shifts.
Currency Dynamics: While the yen remains a crucial factor, its influence on equities has diminished, with domestic-driven sectors gaining prominence.
Geopolitical Considerations: Japan's strategic moves to bolster its industries and maintain robust trade relations with both the US and China are essential for navigating the current global landscape.

This episode of "Thoughts on the Market" provides a comprehensive overview of Japan's economic environment amid global uncertainties, offering valuable insights for investors and stakeholders looking to understand and navigate the complexities of the Japanese market.

If you found this summary insightful, please consider leaving a review wherever you listen to podcasts and share it with colleagues or friends interested in market dynamics.

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Transcript18 lines

[00:02]
A
Welcome to Thoughts on the Market. I'm Chunung Lee, Principal Global Economist at Morgan Stanley MAFG Securities.
[00:08]
B
And I'm Shonakasawa Japan, Equity Strategist at Morgan Stanley MAFG securities.
[00:14]
A
Today we are coming to you live from Morgan Stanley Japan Summit in Tokyo and we will be sharing our views on Japan in the context of global economic growth. We will also focus on Japan's position vis A vis its two largest trading partners, the U.S. and China. It's Tuesday, May 20th at 3pm in Tokyo. Nakazo san, you and I both have been talking with a large number of clients here at the summit. Based on your conversations, what issues are most top of mind right now?
[00:42]
B
There are many inquiries about how to position because of the uncertainty of US Trade policy and the investment strategy for governance reform. These are both catalysts for Japan and in Japan there are multiple governance investment angles with increasing interest in the removal of PLNCHI listings, which is when PLN company and subsidiary company are both listed on an exchange. This reform removes the subsidiaries, so clients are very focused on who will be the next candidate for the removal of a pairlawnchild listing. And what are you hearing from clients on your side?
[01:21]
A
Lisa I would say the most frequent questions we received regarding the Trump administration's policies. Of course, while the reciprocal tariffs have been somewhat relaxed compared to the initial announcements, they still remain very high and there was a strong focus on their negative impact on the US Economy and the global economy, including Japan. Of course external demand is critical for Japanese economy, but when we pointed out the resilience of domestic demand, many investors seem to agree with that view.
[01:51]
B
How do investors views scale with your outlook for the global economy over the rest of the year?
[01:57]
A
Well, there was broad consensus that tariffs and policy uncertainty are negatively affecting trade and investment activities across countries. In particular, there is concern about the impact on investment. As former Fed chair Ben Bernanke wrote in his papers in 1980s, uncertainty tends to delay investment decisions. However, However, I got the impression that views varied on just how sensitive investment behavior is to this uncertainty.
[02:24]
B
How significant are US Tariffs on global economy, including Japan, both near term and longer term?
[02:30]
A
The negative effects on the global economy through trade and investment are certainly important, but the most critical issue is the impact on the US economy. Tariffs essentially act as a tax burden on US consumers and businesses. For example, in 2018 there was some impact on prices, but the more significant effect was on business, production and employment. Now, with even higher tariff rates, the impact on inflation and economic activity is expected to be even greater given the inflationary pressures from tariffs, we believe the Fed will find it difficult to cut rates in 2025. On the other hand, once it becomes feasible likely in 2026, we anticipate the Fed will need to implement substantial rate cuts. So Nakazawa San, how has the Japanese stock market reacted to US Tariffs?
[03:18]
B
Embassy's positioning have skewed sharply to domestically oriented non money shelling sectors since the US government's announcement on reciprocal tariffs on April 2. Tariff talks with some nations have achieved some progress at this stage, spooling buybacks now export oriented manufacturers shares. However, the screening by our analysts of the cumulative surplus returns against Japan's Topix index for around 500 stocks in the Kabula universe, divided into stocks relatively vulnerable to tariff effects and those rest impacted, finds the continued proper hormones as a former we believe it is important to enhance the portfolio's robustness by revising sector skews in accordance with any progress in the trade talks and adjusting long short positioning with the sector is in line with the impact of the tariffs I.
[04:12]
A
See you recently revised your topics in the target, right? Can you quickly walk us through your call?
[04:18]
B
Yes, of course. We recently revised our base case topics target for end 2025 from 2000 to 2600. This revision was concealed by several key factors. So first, our Japan Economics team revised down its Japanese nominal growth forecast from 3.7% to 3.3% reflecting implementation broke out tallies and lower gross followers for the US, China and Europe. Second, AvifX team lowered its dollar yen target from $1.45 to $1.35 due to the risk of US tall data taking a marked turn for the worse. The timing aligns with growing uncertainty on the business environment which may lead firms to manage cash allocation more cautiously. So this year might be a bit challenging for Japanese equities that I recommend staying defensive positioning with defensive non marshaling sectors. Overall, given tariff risks, do you see a change in the Bank Japan's rate path for the rest of the year?
[05:22]
A
Yeah, well, external demand is a very important driver of Japanese economy, even if tariffs on Japan do not rise significantly. Auto tariffs, for example, remain in place and cannot be ignored. The earnings deterioration among export oriented companies, especially in the auto sector, will take time for the bank of Japan to assess in terms of its impact on winter bonuses and next spring's wage growth. If trade negotiations between the US and countries including Japan make major progress by summer, a rate hike in the fall could be a risk scenario. However, a Japan team's base case is that the policy rate will remain unchanged through 2026. How is the Japanese yen faring relative to the US dollar? And how does it impact a Japanese stock market?
[06:07]
B
Nakazasa I'd say dollar yen is not only driver for Japanese equities. Of course, dollar yen still plays a key role in earnings, as our regulation model suggests a 1% higher dollar yen lifting topic 0.5% on average. But this sensitivity has trended down over the past decade. A structural reason is that as value chain building close to final demand locations have lifted overseas production ratios, which implies continuous efforts. Now Japanese copulate optimizing chain. That said, from sector allocation perspective, sectors showing greater resilience include domestic demand driven sectors such as foods, construction and materials. It establishes others transportation and logistics and retails. And finally, the trade relationship between Japan and China is one of the largest trading partnerships in the world. Are US Tallies impacting this partnership in any way?
[07:09]
A
That's a very difficult question, I have to say, but I think there are multiple angles to consider. Geopolitical risk remains to be a key focus and in terms of the military alliance, Japan U. S relationships have been intact. At the same time, Japan faces increased pressure to meet U.S. demands. That said, Japan has been taking steps such as strengthening semiconductor manufacturing and increasing defense spending. So I believe there is a multi faceted evaluation which is necessary. That said, I think it's time to head back to the conference. Nakaza San, thanks for taking time to talk.
[07:42]
B
Great speaking with you Lisa and thanks for listening.
[07:45]
A
If you enjoyed thoughts on the market, please leave us. A review Wherever you listen and share the podcast with a friend or colleague today.
[07:55]
C
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