Japan funds review – what will a US trade deal mean for Japan’s stock market?

As I write, trade tensions between the US and Japan have flared up again, with new tariffs on the horizon. This could be just another round of posturing, but the impact on Japan’s economy and its stock market is uncertain and shouldn’t be overlooked.

Japan has been on a different path when it comes to inflation, interest rates and growth. While this hasn’t always been for good reason, it’s helped the Japanese market stand apart from others and means it offers a source of diversification for investors.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

Rising tariffs = rising pressure?

When US president Donald Trump first announced a barrage of tariffs on dozens of countries, Japan had the potential to be in a decent position to negotiate. The country is the biggest provider of foreign investment into the US, and a lot of big companies, like Toyota, have factories there. Japan is also often considered America’s closest ally in Asia.

However, in early July, the US announced a wave of new tariffs on Japanese goods – including a 25% tariff on vehicles – set to start in August.

The move is part of a broader US strategy to rebalance trade relationships with multiple countries, but Japan’s been among the hardest hit.

The Japanese government has pushed back, but so far hasn’t secured any exemptions. It marks a shift in tone after several years of relatively stable trade ties between the two nations.

For Japanese businesses, especially exporters like automakers and electronics manufacturers, tariffs could squeeze profits. Japan ships around 1.5 million vehicles a year to the US, so the impact could be significant.

The recent trade uncertainty has impacted markets, with exporters naturally bearing the brunt of any negativity from investors.

At the same time, more domestically-focused businesses have tended to be favoured.

Even Japanese bonds have seen some interest given the higher interest rates on offer compared with what we’ve seen for several years.

All of this makes things even more difficult for the Bank of Japan.

It’d been raising interest rates against a backdrop of sought-after inflation, but this seems to be on hold again for now. Especially as higher tariffs could complicate things by dampening export demand and disrupting supply chains.

Some businesses are investing more in local US production to avoid the new tariffs, while others could pass on higher costs to consumers.

This comes at a time when Japan is also dealing with its own ‘cost-of-living crisis’. While wages have been rising, so have the prices of everyday goods like rice and eggs, which makes this all a tough balancing act for the government and businesses alike.

How have Japanese stock markets performed?

Over the year to the end of June 2025, the MSCI Japan Index grew 5.43%*.

This masks periods of volatility though – like most global stock markets, the Japanese market fell sharply in early April following Trump’s tariff announcements on so-called ‘Liberation Day.’

The market subsequently recovered, providing investors with a gain for the year.

The broader global stock market performed slightly better over the year and grew 7.64%.

While the Japanese market didn’t perform as well, it’s been catching up and performed better over the past six months. This is during a time that the US market, which makes up a large part of global markets, has struggled.

Remember though, different markets will come in and out of favour over time. Past performance also isn’t a guide to the future.

In our last sector review, value companies (whose share prices might not reflect their true worth and could rise as they come back on to more investors’ radars) continued to perform much better than growth companies (which are expected to grow their earnings at a more predictable rate or have ‘exciting’ growth potential).

Since the end of March, this trend has reversed.

After this period of catchup from growth companies, the MSCI Japan Growth Index has grown 4.45% over the year compared with 6.06% for the MSCI Japan Value Index. This has naturally impacted funds that favour one of these styles of investing.

Another notable trend over the year is the outperformance of Japanese smaller companies, which grew 13.91%.

Larger companies, like those in the autos industry and others that export goods overseas, have tended not to do so well due to uncertainty from Trump’s tariffs. Smaller companies are higher risk though and tend to be more volatile.

Looking ahead, it might be that more economically sensitive parts of the markets, as well as manufacturers and exporters, could face headwinds until a US trade deal is secured, or tariffs are relaxed.

In the meantime, the broader market could benefit from a continued improvement in corporate governance and positive change within Japanese businesses.

How have Wealth Shortlist funds performed?

Japan’s stock market is often style driven. This comes down to lots of Japanese companies showing traits and characteristics that define either growth or value investing.

So, when a rotation in style occurs, it can impact performance.

And over the last year, value companies have outperformed growth.

Remember, fund managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

For more details on each fund and its risks, use the links to their factsheets and key investor information below. Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and they understand the specific risks of the fund before they invest.