15% tariff agreement, ending the "Age of Discovery" for Japanese capital?

A trade agreement reached with the United States has boosted the Japanese stock market in the short term, but its long-term impact may be more profound—this may signal the end of an era, as Japan's large-scale capital outflow overseas, the "Age of Exploration," may be coming to a close.

According to CCTV News, Japan and the U.S. have reached an agreement on tariff issues. Under the agreement, the U.S. will impose a uniform 15% tariff on Japanese goods, including automobiles, down from the previous 25% rate applicable to global automobile imports. This news has driven the Japanese stock market significantly higher today, as the market generally views this outcome as better than the previously most pessimistic expectations, interpreting it as a short-term victory.

However, deeper market impacts are already beginning to emerge. Some forex arbitrage traders believe that political uncertainty may prevent the Bank of Japan from raising interest rates. Analysts point out that for the global forex and asset markets, what is more decisive is the massive capital that Japan has long directed overseas, which is precisely what the new tariff agreement will touch upon.

According to macro strategist Simon White, the long-term consequence of this agreement may be a reduction in Japan's demand for U.S. Treasury bonds and other foreign bonds and stocks. The global market, especially U.S. assets, may feel the "fresh water" of capital from Japan receding.

Shrinking Trade Surplus, the End of an Era?

The core terms of the U.S.-Japan trade agreement will reshape the trade balance between the two countries. While consumers, importers, and exporters may bear some of the tariff costs, the agreement will still substantially affect Japan's trade performance.

The U.S. market plays a crucial role in Japan's exports, and the implementation of the 15% tariff will inevitably compress Japan's trade surplus with the U.S. Given the enormous size and unique position of the U.S. market, Japan will find it difficult to identify completely alternative export destinations in the short term.

Analysis indicates that Japan's capital expansion overseas has been an important aspect of the global financial market over the past few decades. In the past 20 years, the total amount of foreign securities (stocks and bonds) purchased by Japanese investors has been nearly three times that of foreign investors purchasing Japanese securities.

From the perspective of asset valuation, this gap is even larger, as the value growth of foreign securities during the same period has exceeded that of Japanese securities.

Cooling Attraction of U.S. Treasuries, Trends Already Apparent

It is noteworthy that even before the new trade agreement was reached, Japan's enthusiasm for U.S. Treasuries had already begun to cool. Analysis shows that despite an increase in the attractiveness of 10-year U.S. Treasuries to Japanese buyers after hedging exchange rate risks, Japan's purchasing volume has not rebounded.

This indicates that the trend of Japanese capital flowing overseas has slowed, which may not have begun today but has already been apparent for some time. The new tariff agreement acts more as a catalyst accelerating this trend rather than the fundamental cause. This further reinforces market expectations that there will be a long-term turning point in Japan's capital outflow.

When discussing the yen, the market often focuses on the so-called "carry trade," where hedge funds and other "hot money" borrow low-interest yen to invest in high-yield assets. Such trades have a short-term impact on the yen exchange rate and certain asset prices However, according to analysis, the scale of arbitrage trading is much smaller compared to the massive and structural capital outflow from domestic institutions in Japan. In the long run, what determines the direction of global asset prices is how much capital Japan has and how this "big money" chooses to allocate. This new trade agreement will directly affect the changes in Japan's capital stock, and its long-term consequences will therefore be much more important than the short-term market fluctuations.

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