The longest rally in 16 years! Japanese stocks have rebounded to pre-trade war levels, how will it unfold next?

On Tuesday, the 13th, the Japanese stock market rebounded strongly, with the Tokyo Stock Exchange index rising by 1.1%, achieving a consecutive increase for 13 trading days, marking the longest streak since August 2009; the Nikkei 225 index rose by 1.4%, marking its fourth consecutive day of gains.

This wave of gains may stem from the easing of global trade tensions. According to a report from the Ministry of Commerce on the 12th, China and the United States have canceled a total of 91% of the additional tariffs and suspended the implementation of 24% of counter-tariffs.

According to the trading desk news, JPMorgan Chase's latest research on the 13th indicates that the easing of tariffs between China and the U.S. is expected to reduce the impact on Japanese corporate profits to between -6.4% and -4.2%.

JPMorgan Chase believes that the market recovery is mainly driven by three factors: relatively stable U.S. economic data, progress in trade agreements, and potential easing of semiconductor technology export restrictions.

However, global stock markets are expected to face downward pressure in the summer after a brief continuation of the current strong trend. U.S.-Japan trade negotiations are expected to reach an agreement by mid-June or at the latest by early July (before the Senate elections), at which point the details of the negotiations may boost Japan's semiconductor and materials sectors.

How Tariff Negotiations Affect Japanese Corporate Profits

JPMorgan Chase believes that the U.S.-China trade agreement significantly reduces the negative impact on Japanese companies. According to JPMorgan Chase's research, the easing of tariffs between China and the U.S. is expected to reduce the impact on corporate profits in the Japanese stock market to -6.4%.

If the U.S.-Japan negotiations can reduce tariffs on specific goods such as automobiles to 10%, the negative impact may further decrease to -4.2%. However, if the U.S. maintains high tariff levels, the overall impact on corporate profits in the Japanese stock market could reach -10.9%.

JPMorgan Chase stated that the recovery of the Japanese market since the low point on April 7 has been mainly driven by three factors:

1. Stable Economic Data: Although U.S. soft data has weakened, hard data remains robust;
2. Progress in Trade Negotiations: After May 7, the U.S. announced a trade agreement with the UK and initiated trade negotiations with China;
3. Potential Easing of Technology Restrictions: The U.S. government has indicated plans to lift the Biden administration's restrictions on AI semiconductor technology exports.

However, JPMorgan Chase believes that further increases in global stock markets may be limited, as hard data may begin to show weakness, aligning with the slowdown trend of soft data. The key for the market is whether the U.S. government's policy shift since May 7 can improve soft data before hard data deteriorates, especially regarding the details and impact of easing semiconductor technology restrictions, which will significantly affect the Japanese market

Global Market Expected to Face Pressure This Summer

JP Morgan stated that during the recovery phase after the tariff shock, the Japanese stock market has outperformed other major markets (more prominently in USD terms). This momentum is mainly driven by expectations of progress in US-Japan trade negotiations, corporate reforms, and alleviation of yen appreciation pressure.

Funds are flowing into Japanese and European stock markets, with domestic demand-driven sectors that are less affected by tariffs performing the best, such as retail, food, and information communication industries.

However, JP Morgan's main forecast suggests that global stock markets will face downward pressure this summer after a brief continuation of the current strong trend. The Japanese stock market may be under pressure from the following factors:

• Reduced demand due to a slowdown in the US economy;
• Yen appreciation pressure from expectations of Fed rate cuts/Japan's central bank rate hikes (JP Morgan expects the next rate hike in September);
• Potential negative impacts from the Senate elections scheduled for the end of July.

US-Japan trade negotiations are expected to reach an agreement by mid-June or at the latest by early July (before the Senate elections). Details of the US-Japan negotiations may boost Japan's semiconductor and materials sectors. Additionally, yen appreciation pressure has eased, and corporate reforms (including stock buybacks, industry consolidation, and conversion of wholly-owned subsidiaries) are also making progress.

JP Morgan maintains an "overweight" rating on domestic demand-driven sectors (real estate, information communication, food, retail) as the core of the investment portfolio, while also recommending attention to the upside potential of the semiconductor and materials sectors