Capital Rotation: A Value Play Amidst Tariff\u202fHeadwinds<\/span><\/b>\u00a0<\/span><\/p>\r\n The US Liberation Day announcement on April 2 sent Nikkei 225 plunging. Subsequent tariff pause led to a strong rebound. Since then, Nikkei has recouped the losses.<\/span>\u00a0<\/span><\/p>\r\n Significant risks remain, making renewed weakness possible if tariffs are reinstated after the pause. Major Japanese stocks are heavily reliant on exports to the US. Any disruption significantly hurts their revenues. While examining the tariff impact through the shift in Bank of Japan (BOJ)\u2019s monetary policy, the paper also unpacks recent trend of capital rotation into Japan market.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Chart 1: Nikkei 225 price action on tariff and its pause<\/span>\u00a0<\/span><\/p>\r\n \u00a0<\/span><\/i> \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/span><\/i><\/a>\u00a0<\/span><\/p>\r\n Tariffs & Shifting BOJ Outlook<\/span><\/b>\u00a0<\/span><\/p>\r\n Trade tensions have cast a long shadow over Japan\u2019s economic outlook. At its May 1 meeting, the BOJ held its short-term interest rate at 0.5%, while sharply cutting upcoming growth forecasts.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Market expectations of BoJ rate trajectory have shifted. In a recent <\/span>Reuters poll<\/a><\/strong><\/span>,\u00a0 <\/span>expectation of<\/span> a rate hike in Q3 2025 declined from nearly two-thirds to just over 50%. Meanwhile, 84% of respondents do not anticipate any rate hikes at BoJ\u2019s June meeting.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Chart 2: The outlook of BoJ rate hikes has been pushed further out, but the terminal rate by the end of 2025 remains unchanged.\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a<\/span><\/i> TradingView<\/span><\/i><\/a>\u00a0<\/span><\/p>\r\n The BOJ halved the projected GDP growth for fiscal 2025\/26 (to 0.5%) and pushed back the timeline for hitting its 2% inflation target by a full year to 2026.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Governor Kazuo Ueda <\/span>warned<\/a><\/span> \u90a3 <\/span>\u201crecent developments surrounding tariffs will weigh on Japan’s economy by slowing global growth, hurting corporate profits, and prodding households and companies to hold off on spending\u201d.<\/span><\/i>\u00a0<\/span><\/p>\r\n Policymakers struck a cautious tone, noting \u201cextremely\u201d high uncertainty around the outlook and indicating they will gauge data carefully before adjusting rates.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Downside Risks from Export Weakness<\/span><\/b>\u00a0<\/span><\/p>\r\n Nikkei has heavy weighting toward major exporters. U.S. tariffs pose a significant risk to their revenues.<\/span>\u00a0<\/span><\/p>\r\n Beyond the direct revenue impact, exporters feel the heat of a strong yen. A weaker yen boosts profits when foreign earnings are converted, but as the yen strengthens, the profits tend to shrink due to currency effects.\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u00a0According to Toyota, one yen change in the USD\/JPY currency pair impacts its operating profit by 50 billion yen.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Chart 3: Yen has appreciated 8.8% against the dollar YTD but remains 25% weaker from its 2022 level.<\/span>\u00a0<\/span><\/p>\r\n \u00a0<\/span>\u00a0<\/span><\/p>\r\n \u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/span><\/i><\/a>\u00a0<\/span><\/p>\r\n Chart 4: Historically, the Nikkei 225 has shown weaker performance when export volume losses coincided with yen-driven margin compression.<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/span><\/i><\/a>\u00a0<\/span><\/p>\r\n In particular, the tariffs risk impacting the Nikkei 225\u2019s heavy technology exposure.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Chart 5: The Nikkei 225 is dominated (47% weightage) by the tech sector\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>Nikkei<\/span><\/i><\/a>; as of April 30<\/span><\/i>\u00a0<\/span><\/p>\r\n In an earnings update, Tokyo Electron Management (which has a 5.6% weight) indicated a flat business environment for the year, citing a \u201clull in both automotive and power semiconductor investment, and investment by emerging Chinese manufacturers.\u201d Strong growth is only expected in 2026.<\/span>\u00a0<\/span><\/p>\r\n The retail industry \u2013 a major index component (14%) – is dominated by Fast Retailing, which holds the single largest individual weight in the index at 11%.<\/span>\u00a0<\/span><\/p>\r\n Fast Retailing the holding company of Uniqlo chains, has already <\/span>trimmed<\/a><\/span> second-half profit guidance by roughly 2%-3% after accounting for potential duties, despite sourcing most U.S. inventory from lower-tariff Southeast-Asian plants.\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u00a0<\/span><\/p>\r\n Capital <\/span><\/b>Reotation<\/span><\/b>Rotation<\/span><\/b> to Japan Through the lens of P\/E Convergence<\/span><\/b>\u00a0<\/span><\/p>\r\n Despite these challenges, global investors are increasingly rotating capital into international equities amid intensifying trade tensions.\u00a0<\/span>\u00a0<\/span><\/p>\r\n EU defence stocks have surged. Chinese equities have risen. Japanese stocks stand to benefit too. Foreign funds were <\/span>net buyers<\/a><\/span> of Japanese stocks for\u00a0 three weeks in a row in April.\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u00a0<\/span><\/p>\r\n Chart 6: Net weekly foreign investment in Japan stocks has started to ramp up<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TSE<\/i><\/a>\u00a0<\/span><\/p>\r\n Japan offers a compelling relative value story. The Nikkei 225 trades at a P\/E ratio of 18.3, roughly 34% cheaper than the S&P 500 (27.9 P\/E). This valuation gap stands at near multi-decade highs, suggesting room for P\/E multiple convergence as Japan\u2019s capital market attracts more inflows.<\/span>\u00a0<\/span><\/p>\r\n Chart 7: Nikkei 225\u2019s P\/E Ratio is substantially lower than S&P 500, suggesting the potential for P\/E convergence\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>Nikkei<\/i><\/a> \u548c <\/i>Multpl<\/i><\/a>\u00a0<\/span><\/p>\r\n Conclusion<\/span><\/b>\u00a0<\/span><\/p>\r\n The tariff impact on Japanese equities is multi-faceted. Delay in BoJ rate hikes offers near-term support for the equity market, potential long-term effects on growth & inflation could offset these gains. Moreover, given Japan\u2019s export-dependent economy, tariffs pose a significant revenue risk\u2014particularly for firms with a high index weighting in the Nikkei 225. Many of these companies are already issuing more conservative outlooks for the year ahead.<\/span>\u00a0<\/span><\/p>\r\n Chart 8: Technical signals point to a bullish sentiment on Nikkei 225 although resistance is on the horizon\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/i><\/a>\u00a0<\/span><\/p>\r\n Investors expecting a favourable trade deal may opt for a long position on the Nikkei 225. A hypothetical trade setup is outlined below.\u00a0 In this case, the yen-denominated Micro Nikkei Futures contract could further enhance the profit in USD due to the anticipated strengthening of the yen.<\/span>\u00a0<\/span><\/p>\r\n Chart 9: Hypothetical long position on CME Micro Nikkei 225 (Yen) futures expiring in June\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/i><\/a>\u00a0<\/span><\/p>\r\n \u00a0<\/span><\/p>\r\n Entry<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n If Nikkei 225 rises<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n Stop Loss<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n Potential Gains (JPY)<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n Potential Losses (JPY)<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n Reward-to-Risk<\/span><\/b>\u00a0<\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n 36,700<\/span>\u00a0<\/span><\/p>\r\n<\/td>\r\n 38,500<\/span>\u00a0<\/span><\/p>\r\n<\/td>\r\n 35,200<\/span>\u00a0<\/span><\/p>\r\n<\/td>\r\n JPY 90,000<\/span>\u00a0<\/span><\/p>\r\n ((38,500 – 36,700) x 50 yen\/contract)<\/span><\/i>\u00a0<\/span><\/p>\r\n<\/td>\r\n JPY 75,000 <\/span>((35,200 – 36,700) x 50 yen\/contract)<\/span><\/i>\u00a0<\/span><\/p>\r\n<\/td>\r\n 1.2x<\/span>\u00a0<\/span><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \u00a0<\/span><\/p>\r\n Conversely, investors anticipating the continuation of tariffs may consider taking a short position on the Nikkei 225.\u00a0<\/span>\u00a0<\/span><\/p>\r\n Chart 10: Hypothetical short position on CME Micro Nikkei 225 (Yen) futures expiring in June\u00a0<\/span>\u00a0<\/span><\/p>\r\n \u6765\u6e90\uff1a <\/span><\/i>TradingView<\/i><\/a>\u00a0<\/span><\/p>\r\n![\"\"](\"https:\/\/www.phillipnova.com.sg\/wp-content\/uploads\/2025\/05\/1-1024x541.png\")
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