Japan Stocks Surge as Trade Optimism Lifts Markets, But Risks Remain

The Nikkei 225 index rose to a 1-1/4 month high this week, closing up +0.41%, as global markets rallied on optimism stemming from the U.S.-U.K. trade deal and hopes for easing tensions in U.S.-China tariff disputes. This marked a turning point for Japan’s equity markets, which had been buffeted by trade uncertainties over the past year.

The U.S.-U.K. Deal: A Catalyst for Near-Term Optimism

The May 2025 U.S.-U.K. trade agreement, while limited in scope, provided a critical signal that tariff wars might be de-escalating. Key provisions included retaining a 10% baseline tariff on U.K. imports but reducing auto tariffs from 27.5% to 10% for the first 100,000 vehicles annually. Additionally, U.K. steel and aluminum exports were exempted from U.S. duties, while both nations imposed 25% tariffs on foreign competitors in these sectors.

This deal, though described as a “conceptual plan” with unresolved details, eased fears of a full-blown trade collapse. Investors interpreted it as a precedent for broader agreements, spurring a risk-on environment that benefited Japan’s export-reliant economy.

China Tariffs: Lingering Uncertainty, Modest Relief

While the U.S. maintained its 145% tariffs on Chinese goods, hopes for diplomatic progress buoyed markets. President Trump’s pledge to engage in talks with China in Switzerland (starting May 10) reduced near-term risks of further escalation. Japan, a key trade partner for both nations, indirectly benefited as investors priced in lower probabilities of a global recession.

However, unresolved issues—such as U.S. auto tariffs on Japan and the exclusion of China from tariff pauses—persist. Chief Cabinet Secretary Yoshimasa Hayashi reiterated Japan’s calls for U.S. tariff reviews on steel, aluminum, and autos, underscoring lingering vulnerabilities.

Sectoral Winners: Semiconductors Lead the Charge

Japan’s semiconductor sector surged, with stocks like Advantest, Tokyo Electron, and Screen Holdings climbing 3.7%, 2%, and 1.4%, respectively. This followed reports that the U.S. planned to rescind Biden-era AI chip curbs, easing restrictions on global supply chains.

The Nikkei’s rise was further supported by energy stocks, which gained 2.9% as oil prices rebounded amid reduced trade-war fears. Meanwhile, corporate-specific news—such as NTT Data Group’s 17% jump on a tender offer rumor—highlighted resilience in domestic markets.

Risks Ahead: Trade Talks and Policy Uncertainties

Despite the rally, risks remain. The U.S.-U.K. deal’s narrow focus—excluding digital services taxes and broader regulatory alignment—leaves room for future disputes. Additionally, the July 9 expiration of a 90-day tariff pause looms as a deadline for resolving U.S.-China trade conflicts.

Japan’s economy also faces headwinds: persistent inflation, a 5.7% rise in U.S. unit labor costs, and the Federal Reserve’s cautious stance on interest rates. While the Fed held rates steady at 4.25%-4.5%, prolonged high rates could dampen corporate earnings and consumer spending.

Conclusion: A Fragile Rally

Japan’s stock market has rebounded to a 1-1/4-month high, driven by trade deal optimism and sector-specific gains. The Nikkei’s 0.41% weekly climb to 36,928.63 reflects reduced near-term trade risks and investor hopes for broader agreements. However, unresolved issues—such as U.S.-China tariffs and the U.S. auto duties on Japan—threaten to undermine this progress.

Investors should remain cautious: while the U.S.-U.K. deal provided a short-term boost, sustained gains will require concrete policy shifts and resolution of major trade disputes. For now, Japan’s markets are caught between cautious optimism and lingering uncertainty—a dynamic likely to persist until the July 9 deadline and beyond.