Investing.com-- Citi analysts noted that Japanese stock markets sold off sharply on Monday amid concerns over increased trade tariffs under U.S. President Donald Trump, but saw limited scope for further weakness.
The Nikkei 225 index slid 2.3% on Monday after Trump signed executive orders imposing 25% tariffs on Canada and Mexico, and a 10% duty on China.
But the index rebounded over 1% on Tuesday as Trump said the tariffs on Mexico and Canada will be postponed following border agreements with the two countries.
Citi analysts said that they saw little scope for further weakness in Japanese stocks, given that they were trading at relatively lower valuations than their U.S. peers since October 2024.
They also expect few chances of Trump imposing tariffs against Japan before the U.S.-Japan summit later in February.
Among Japanese stocks, automaking shares such as Toyota (NYSE:TM) were the worst hit by Trump’s tariffs, given that the sector relies heavily on Mexican manufacturing.
But Citi noted that auto stocks had also largely lagged their peers in the second half of 2024, providing limited scope for further weakness.
Citi analysts said that in the event of a prolonged global trade war, central banks were likely to carry out more monetary easing, increasing market liquidity. Such a scenario is expected to benefit U.S. stocks as well as Japanese markets, given their positive correlation with the U.S.
Still, Citi analysts noted that the outlook for Japanese markets still remained uncertain, given that Trump’s policies are still unclear.
Japan’s economy is also set to undergo major shifts this year as the Bank of Japan raises interest rates further, amid higher inflation and improved private spending.