Nomura: In the face of tariff turmoil, the Federal Reserve and the Bank of Japan have reached a crossroads

Zhitong Finance APP learned that Nomura warned that the rushed tariff negotiations between the United States and other countries are exacerbating economic uncertainty, while the risks of inflation and the possibility of historical repetition require central banks such as the Federal Reserve and the Bank of Japan to act cautiously.

Chaotic Tariff Negotiations

The tariff policies unilaterally announced by the Trump administration have led to global chaos. The U.S. is negotiating with multiple countries simultaneously, but due to a shortage of personnel, "agreements" are hastily reached, leading to vague details and disputes. For example, the U.S.-Japan agreement initially did not clarify whether the 15% tariff was an additional rate or a total tax rate cap, and it was later confirmed to be the maximum total tax rate. This hastiness stems from the fact that the Office of the United States Trade Representative (USTR) has only 250 employees, while the International Trade Administration (ITA) of the Department of Commerce has about 2,200 people, but the actual manpower dedicated to negotiations is limited.

Tariffs inherently reduce economic efficiency, and the Trump administration's approach—such as imposing a 50% tariff on India (25% reciprocal tariff + 25% additional tariff)—further neglects strategic considerations. The report points out that tariff uncertainty makes it difficult for businesses to formulate commercial plans, which may lead to a further contraction in overall economic activity.

Risk of Repeating Black Monday

Nomura draws an analogy to the Plaza Accord of 1985, emphasizing the similarities between the current situation and history. After the Plaza Accord, the dollar fell 36.5% against the yen in 17 months, but the U.S. stock market reached new highs, with initial inflation not apparent because companies compressed profits to maintain market share. However, when the dollar fell below 150 yen, it triggered Japanese investors to sell dollar-denominated bonds, causing U.S. Treasury yields to soar.

The intervention of then-Federal Reserve Chairman Paul Volcker stabilized the market, but the hesitation of his successor, Alan Greenspan, ultimately led to Black Monday on October 19, 1987. Currently, Trump's tariffs and the expulsion of illegal immigrants are sowing the seeds of inflation, but the effects are lagging—businesses need time to assess whether to raise prices or lobby for exemptions. Inflation has not yet manifested but poses significant risks.

The Federal Reserve and the Bank of Japan at a Crossroads

The Federal Reserve and the Bank of Japan are facing completely opposite challenges. The Federal Reserve is hesitant to cut interest rates due to inflation risks caused by tariffs and labor shortages, despite pressure from the Trump administration—such as Treasury Secretary Mnuchin advocating for a model-based rate cut of 150-175 basis points, but existing models cannot assess the impact of large-scale tariffs or the expulsion of immigrants. Nomura believes that Federal Reserve Chairman Jerome Powell needs to be vigilant; if inflation accelerates alongside an economic slowdown, the U.S. may fall into stagflation, forcing the Federal Reserve to make difficult trade-offs between curbing inflation and protecting the economy.

On the other hand, the Bank of Japan is delaying interest rate hikes due to the impact of tariffs on the Japanese economy, even though a weak yen exacerbates food inflation—the main reason for the ruling Liberal Democratic Party's poor performance in the 2024 House of Representatives and 2025 Senate elections is the impact of inflation on people's livelihoods. Nomura suggests that Japan should raise interest rates when the economy permits to stabilize the yen and curb inflation, avoiding reliance on fiscal subsidies (due to the massive fiscal deficit); The Federal Reserve needs to learn from the lessons of 1987 and closely monitor inflation dynamics.

Trump's tariff policy is not only an economic issue but also threatens global stability. History shows that the lagging nature of inflation and the market's lack of confidence in the Federal Reserve could trigger a market crash.

Nomura believes that Japan should prioritize interest rate hikes to alleviate political pressure, while the Federal Reserve must resist government calls for interest rate cuts to prevent the risk of stagflation. Otherwise, hasty decisions could repeat the mistakes of Black Monday and exacerbate global economic turmoil