Nikkei 225 Drops Below 35,000 as US Tariffs Hit Hard

Japan's benchmark Nikkei 225 index suffered a significant blow today, plunging 2.77% to sit below the psychologically crucial 35,000 level as sentiment soured dramatically following the announcement of sweeping reciprocal tariffs by the United States. The catalyst for the market rout was the confirmation of new US tariffs, including a broad 24% levy on Japanese goods and a targeted 25% tariff on automobiles – a direct hit to one of Japan's most critical export sectors.

The sharp sell-off underscores deep anxieties about the potential fallout for Japan's heavily export-dependent economy, pushing the index to lows not seen since the middle of last year. Markets had been front running some of the tariff news, with the decline on the past 5 days standing at 7%.

Index heavyweights were particularly hard hit. Automotive giant Toyota's shares saw its shares drop 5.18%, alongside significant losses for technology and finance bellwethers like SoftBank Group (-3.92%), Tokyo Electron (-3.68%), Fast Retailing (Uniqlo's parent company, -1.78%), and Sumitomo Mitsui Financial Group (-7.69%).

This recent turmoil paints a grim picture for the index's performance in 2025. Year-to-date, the Nikkei 225 is now nursing losses of 11.63%, wiping out early-year gains, with the technical landscape also turning bearish.

The index is now trading significantly below both its 50-day and 200-day moving averages, with market technicians noting the recent formation of a “death cross”, where the shorter-term 50-day moving average crosses below the longer-term 200-day moving average . Further reinforcing the pessimistic outlook, only about 16% of the index's constituent stocks remain above their 50-day MA, although a slightly healthier 60-63% are still above the 200-day MA, suggesting some underlying long-term resilience for specific companies that is currently being overshadowed.

The escalating trade tensions have swiftly eclipsed previously positive narratives surrounding the Japanese market. While Japanese corporate earnings staged a robust recovery through 2024, fueled by factors like a weaker Yen and ongoing corporate governance reforms aimed at boosting shareholder value, the focus has shifted dramatically to macroeconomic headwinds. Bank of Japan Governor Kazuo Ueda himself cautioned that the new tariffs could significantly impact global trade flows and economic growth, adding a layer of official concern to the market's jitters. Business sentiment surveys had already indicated weakening confidence among Japanese companies in the first quarter, anticipating these trade frictions.

🟩 The Bull Case

• Strong 2024 Earnings Base: Underlying corporate profitability saw significant improvement, providing a potentially resilient foundation.
• Ongoing Governance Reforms: Continued focus on shareholder returns (buybacks, unwinding cross-holdings) could offer structural support.
• Domestic Demand Potential: Wage growth and domestic consumption could partially buffer export weakness, though this remains uncertain.
• Valuation Levels: Post-selloff P/E ratios might attract long-term value investors looking beyond immediate turmoil.
• Potential BOJ Delay: Significant economic impact from tariffs might lead the Bank of Japan to postpone further monetary tightening, offering temporary market relief.
• Structural Transformation: Long-term arguments for Japan's economic revitalization and shift away from deflation persist among some strategists.

🟥 The Bear Case

• US Tariffs & Global Trade War: The primary driver of negative sentiment, directly threatening Japan's export engine (especially autos) and risking global recession.
• Overwhelmingly Negative Sentiment: Fear is dictating market direction, potentially leading to further technically driven selling.
• Weak Technical Setup: Index below key MAs, “death cross” formation, and negative momentum indicators suggest further downside potential.
• Global Slowdown Risk: Broader economic deceleration concerns, exacerbated by trade disputes, could curb demand for Japanese products.
• Yen Volatility Risk: Unpredictable currency swings driven by risk aversion or future policy shifts add uncertainty; potential Yen strength later in 2025 could hinder exporters.
• Moderating Earnings Growth: Growth was already expected to slow in 2025 *before* accounting for the negative impact of tariffs.

The Nikkei 225 finds itself caught in the crosshairs of escalating global trade tensions. While Japan's corporate sector showed resilience in 2024, the immediate outlook is heavily clouded by the spectre of a trade war and its potential impact on both Japanese exporters and the wider global economy.