Whether Shintaro Ishihara stays or goes is not important; a 15% tariff is the unexpected joy for Japanese stocks?

Significant Breakthrough in Japan-U.S. Tariff Negotiations, Is There New Favor for the Japanese Stock Market?

According to CCTV News, Japan and the United States have reached an agreement on tariff issues, the U.S. will impose a 15% tariff on Japan and increase imports of U.S. rice. The agreement also includes Japan's commitment to invest $550 billion in the U.S.

Bank of America Merrill Lynch released a latest report indicating that the alleviation of tariff uncertainty has boosted the Japanese stock market. The U.S. tariff on Japan has been reduced from 25% to 15%, and the automobile tariff has also been lowered accordingly. The 15% tariff rate is the lowest level announced for reciprocal tariffs against other countries to date, which will enhance the competitiveness of Japanese companies. In particular, the reduction in automobile tariffs will directly improve the price competitiveness of Japanese cars in the U.S. market, and cyclical sectors such as automobiles are expected to see a reversal.

Multiple Japanese media outlets reported that Prime Minister Shigeru Ishiba may resign before the end of August. Bank of America stated that Ishiba's resignation would have a limited impact on the Japanese stock market. Regardless of the successor scenario, there is a certain positive significance for the Japanese stock market.

Tariff Benefits Materialize, Major Boost for the Japanese Stock Market

In recent months, the U.S. has raised tariffs on several countries, and Japan has been negotiating with the Trump administration for exemptions or reductions. Now, Japan has become the first country to receive "most-favored-nation" treatment, with a 15% tariff rate being the lowest level announced for reciprocal tariffs against other countries to date, which will enhance the competitiveness of Japanese companies.

1. Japanese Companies' Export Costs Decrease, Especially Beneficial for Automotive Stocks

Bank of America stated that the reduction in automobile tariffs will directly enhance the price competitiveness of Japanese cars in the U.S. market. Many pricing strategies, investment plans, and overseas mergers and acquisitions that were previously delayed due to uncertainty are expected to restart.

2. EPS Expectations Have Been Significantly Downgraded, Some Tariff Impacts May Have Been Priced In by the Market

Bank of America pointed out that expectations for Japanese stocks have been restored, and valuations may further rise. As of now, the earnings per share (EPS) forecast for the fiscal year 2026 has been significantly downgraded from an 8-9% year-on-year growth in March this year to a recent growth of 1.6%, indicating that the impact of tariffs has been partially factored into expectations.

Considering that the 12-month forward EPS for U.S. and European stock markets bottomed out in April and May, and since many U.S. and European companies' fiscal years end in December while Japanese companies often end in March, the 12-month expected EPS for the Japanese stock market typically lags behind that of the U.S. and Europe by about three months. Bank of America stated that the EPS for the Japanese stock market is also expected to bottom out after the first quarter earnings reports are released, and subsequently, the EPS for Japanese stocks is expected to rebound.

Additionally, if Japan's large-scale investment in the U.S. leads to a depreciation of the yen, it may further boost the EPS of Japanese companies.

3. Market Expectations Restore, Valuations May Further Rise

Bank of America noted that price-to-earnings ratios often rise slightly before EPS bottoms out and subsequently exceed the median range of around 14 times. When the price-to-earnings ratio and EPS rise simultaneously, the Japanese stock market often enters an upward channel. Therefore, if the tariff issue is resolved and EPS confirms a bottom, the upside potential for the Japanese stock market will further open up

Shigeru Ishiba's Resignation Has Limited Impact on the Japanese Stock Market

Despite reports of Shigeru Ishiba's resignation, the impact of this event on the market is relatively limited.

If conservative figures like Sanae Takaichi come to power, it may delay interest rate hikes and oppose fiscal expansion. Although interest rates may rise in the short term, this could help curb excessive fiscal expansion, and Japan's tax revenue is steadily increasing in the context of inflation. This may not have a negative impact on the stock market; rather, it could help avoid radical policy swings.

If moderate figures like Fumio Kishida or Yoshihisa Inoue take office, they may continue the policy direction of "building a nation through asset management." If Shinjiro Koizumi comes to power, he may focus more on promoting "deregulation."

Overall, regardless of the successor scenario, there is a certain positive significance for the Japanese stock market.

Sector Rotation May Intensify, Style Shift Signals Strengthen

Bank of America pointed out that in recent times, uncertainty has driven market funds to concentrate on structural growth stocks. However, with the favorable tariff policies taking effect and a weaker exchange rate boosting external demand expectations, we may see the following trends.

1. The "Reversal Trend" of Cyclical Stocks Begins

Bank of America expects a reversal in market style, with export-oriented cyclical stocks (such as automotive stocks) that were previously seen as heavily pressured due to tariff impacts likely to rebound. Additionally, factory automation and other capital expenditure-related sectors are also worth close attention.

2. Rotation Opportunities in Financial Stocks

If tariff issues are resolved and market expectations for the Bank of Japan's interest rate hikes are reignited, financial stocks such as banks may see valuation recovery. However, if conservative leaders (like Takaichi) are in power, expectations for interest rate hikes may cool again.

3. Consumer Stocks Related to Domestic Demand

If rice imports from the United States increase, rice prices may fall, which could improve consumer sentiment and benefit domestic demand. Therefore, sectors related to Japan's domestic demand are still worth continuous attention