Navigating Japan's Manufacturing Recovery Amid U.S. Tariff Risks: Sector Resilience and Equity Opportunities

The July 2025 Reuters Tankan survey reveals a bifurcated landscape in Japan's manufacturing sector: while semiconductors and chemicals exhibit robust recovery signals, automakers grapple with escalating U.S. tariff pressures. This divergence offers investors a clear roadmap—targeting undervalued equities in tech and chemicals while steering clear of export-reliant automotive names. Here's how to parse the opportunities and risks.

Semiconductors: The Bright Spot in Japan's Manufacturing Revival

The electronics machinery sector's Tankan index surged to -4 in July from -16 in June, signaling a rebound in semiconductor demand. This improvement is underpinned by stronger domestic orders and global chip shortages easing, particularly in automotive electronics and advanced computing applications.

Investment Play: Companies like Rohm Co. (6963.T) and Renesas Electronics (6723.T) stand out. Both are key suppliers to global chipmakers and have diversified into EV semiconductor solutions—a growth driver as automakers shift to electric vehicles. shows it trades at a 20% discount to its five-year average P/E ratio, offering asymmetric upside.

Chemicals: Strength in Diversification and Domestic Demand

The chemicals sector's Tankan index rose to +18 in July, its highest in three years, driven by recovering demand from semiconductors and construction materials. Firms like Mitsubishi Chemical (4010.T) and Dai-ichi Kogyo Seiyaku (4054.T) are benefiting from stable pricing power and shifts toward eco-friendly materials for renewable energy infrastructure.

highlights a 12% year-on-year rise in profits, with 18% of revenue now from green tech products. This aligns with Japan's push to decarbonize, making these stocks a buy for long-term thematic plays.

Automotive: Trapped Between Tariffs and Trade Uncertainty

The transport machinery sector's Tankan index plummeted to +9 in July, its lowest since late 2022, as the 25% U.S. auto tariffs bite. Automakers like Toyota (7203.T) and Honda (7267.T) have cut export prices by 19.4% year-on-year to offset tariff costs, but this strategy risks eroding profit margins. shows a 22% underperformance, reflecting market skepticism about its ability to navigate trade headwinds.

Geopolitical risks amplify the pain. U.S. threats to expand tariffs to all Japanese imports by August 1 could force further production relocations, such as Toyota's $1.3 billion Georgia plant. While this reduces tariff exposure, capital expenditure spikes may strain balance sheets.

The Bank of Japan's Role: A Tailwind for Equity Valuations

The Bank of Japan's delayed rate hikes and accommodative policy remain a critical backstop. With the yen hovering near 160 yen/$1—a level that boosts export competitiveness—equity valuations, particularly for domestic-demand-linked firms, are buoyed.

Investment Strategy: Focus on Resilience, Avoid Tariff-Exposed Names

1. Long Positions:
2. Semiconductors: Target pure-play chipmakers like Renesas and suppliers with EV exposure.

3. Chemicals: Prioritize firms with green tech and construction material exposure, such as Mitsubishi Chemical.

4. Short/Neutral Positions:

5. Automakers: Avoid names highly reliant on U.S. exports until tariff uncertainty resolves.

6. Watch for Catalysts:

7. A negotiated U.S.-Japan tariff deal by August could stabilize auto stocks, but the bar for a meaningful rebound is high.

Conclusion: A Sector-Specific Approach to Profit

Japan's manufacturing recovery is uneven, but investors can capitalize by distinguishing between tariff-resistant sectors and those trapped in trade wars. The Bank of Japan's support and domestic demand tailwinds favor chemicals and semiconductors, while automakers remain a high-risk bet until trade policies stabilize. For now, selective longs in tech and chemicals offer the best risk-reward, while automakers warrant caution until the U.S. tariff overhang lifts.

Data sources: Reuters Tankan, Bank of Japan, company reports.