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US trade tariffs on Japanese auto sector not "logical"

US trade tariffs on Japanese auto sector not

Japan could be next on the trade hit list for US President Donald Trump, but a leading strategist has claimed that any levies on Japanese automakers would not be "logical."

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By Meili Chen 11.09.2018

Japan could be next on the trade hit list for US President Donald Trump, but a leading strategist has claimed that any levies on Japanese automakers would not be “logical,” as the country has not imposed duties on any car imports for 50 years.

The Wall Street Journal’s James Freeman said last week that Trump may target Japan in the near future as the current US administration continues its attempts to eliminate trade deficits with global trading partners. Freeman said that Trump talked about his strong relationship with Japanese leadership but hinted that a trade fight could be on the horizon.

According to experts, Japan’s automotive sector may be particularly vulnerable to any trade tensions with the US, as it currently accounts for 75% of the trade balance between the two countries. Investors have already recognized the precarious nature of the auto sector in Japan in terms of stocks and have largely avoided buying into them due to uncertainty about how a trade dispute could escalate.

Investor sentiment has already had a negative impact on Japan’s auto industry in 2018. The country’s largest car market, Toyota, has logged an 8.55% decline in share value during the first eight months of the year. However, CSLA Japan Strategist Nicholas Smith believes that any moves by the US to introduce tariffs on the sector would not make sense.

“My answer on that is it isn't logical that [Japan is] hurt by Trump tariffs. It's got a $69bn trade surplus with the US, yes it does, but almost all of that is in two areas: autos and machinery,” Smith said at the Hong Kong-based CLSA Investors’ Forum. "And both of those areas it's got 0% tariffs on. It's got zero on autos since 1968.”

University of Shizuoka Professor Seijiro Takeshita touched on a similar theme last month when he said that US tariffs on the auto industry in Japan would not make “rational sense.” However, Smith noted that the capricious nature of the Trump administration means that anything is possible.

While tariffs threats loom large, Japanese enterprises have enjoyed a bumper year with better-than-expected profits for the latest quarter. Economic growth is also healthy, having surged 3% year-over-year during Q2, which is the fastest rate of growth for more than 30 months.

There has been a heightened level of geopolitical uncertainty in 2018, but Smith said that many investors now believe that “this is not a bad year at all.” However, further trade conflict between the world’s largest economies and concerns about recession will shape sentiment during the final quarter.

While Japan faces up to a potential trade standoff, China continues to feel the brunt of its now two-month-long conflict with the US. Chinese markets have slumped in recent months, with the benchmark Shanghai Composite having shed 18% of its value since January, and an investment expert warned on Monday that they could yet sink further.

During the CLSA Investors’ Forum, CLSA China Capital Access Head Alexious Lee said: "But we think that the real fundamental bottom will probably be in October, November."

Lee urged investors to position themselves in the coming weeks so that they are prepared for the bottoming out of Chinese markets. There is an opportunity for savvy market watchers to benefit, and Lee believes that “top-notch industrial companies in very niche technologies” are among the ones to look out for. He added: “The Chinese have become more affluent, and the need for an upgrade of products, services is definitely evolving or changing the way the market consumes.” 

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