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Last week, said the head of trading at one brokerage in Tokyo, markets were unsure what they were seeing. Was Donald Trump serious about tariffs or was it brinkmanship? Would there be a sudden rash of deals that made it all go away? Was this the end of the global trading system?
“Then over the weekend, when you saw China retaliating on tariffs, Trump digging in with the assertion that turmoil was “medicine” and no deals on offer for very US-friendly nations like Japan, everyone came in on Monday more sure that this was bad, and for real,” he said, as Tokyo-listed stocks lurched down by over 9 per cent at the open.
Arguably the most unsettling aspect of Monday’s sell-off in Tokyo and Asia, said analysts, was the extent to which it was rational, rather than panic-stricken.
Perhaps even more troubling for those wondering whether relief might suddenly come from the White House is a look at the Dow Jones index since the start of Trump’s first presidency in 2017: it is up more than 90 per cent even after last week’s drop, said one broker. “Does he think the markets can take a lot more pain as long as they are in the black on his watch?”
The weekend let market participants consider the implications of not only tariffs, but also a possible global recession and a flood of cheap, redirected Chinese goods into non-US markets. This could trigger a deflationary tsunami and central banks would have limited ability to contain the damage.
For Japan in particular, that set of concerns also casts huge doubt over the central bank’s ability to raise rates and normalise monetary policy.
The extreme ructions in Tokyo — plummeting stocks, falling bond yields and huge volatility in the yen — encapsulate the difficulty that now confronts investors across asset classes. As many traders noted, so far most of the global turmoil has been driven by shorter-term money. Markets have still not felt the impact of what could be far greater rotation out of risk by global long-only funds.
As one Tokyo-based asset manager put it, it is hard to think of a time when the situation presented such binary outcomes, with so little visibility on either side. The markets are now properly pricing the idea that nobody speaks for Trump except Trump, “which reduces your universe of market sources to one person”.
“If the tariffs stick at these levels,” the manager added, “it’s not too late to sell stocks. If tariffs get unwound, it’s the mother of all bounces. Getting the positioning correct for two outcomes at completely different ends of the spectrum is very, very difficult.”
For many years, said Tokyo equity brokers, the strategy of buying the dips has worked well. Moments of turmoil were, for many, an outright opportunity. There was a perception, borne out time and again by experience, that the recovery would eventually come and all the risk would lie in missing the bounce.
Suddenly, the concern is that enough has now been changed by Trump’s actions for that strategy to be in doubt: there may be deals to be done over tariffs, but Japan shows how high the bar has been set. Japan is America’s closest ally in Asia, and the biggest direct investor in the US. It is now listed among the “pillagers” of America and has failed to secure any relief from the “liberation day” tariffs of 24 per cent.
Prime Minister Shigeru Ishiba in effect admitted to parliament on Monday that Japan’s salvation might lie in hoping for the best on tariff relief but preparing for the worst via domestic stimulus.
If he is right, investors globally have a great deal more repositioning ahead of them.