The deficit narrowed, but December’s export slowdown to the U.S. and China’s rare-earth retaliation set up a 2026 yen-weakness trade.
The headline numbers look softer—until December
Japan’s full-year trade gap for 2025 came in at ¥2.65 trn ($17 bn), down 53% from 2024’s blow-out, thanks to a 3.1% rise in exports and flat import growth. But the December print flashed red: export growth decelerated to 5.1% while imports sped up to 5.3%, trimming the monthly surplus to ¥105.7 bn, 12% lower than December 2024.
Washington tariffs bite faster than Tokyo expected
Shipments to the United States dropped 11% in December alone, the steepest monthly decline since the 25% auto-threat first surfaced. The White House ultimately levied a 15% blanket tariff on most Japanese goods—10 points below the opening salvo, but still triple the pre-Trump rate. With autos and semiconductors now facing dual U.S. and China friction, Japan’s largest export categories are caught in a margin-crushing pincer.
Beijing’s rare-earth card is already in play
China’s December curb on critical-mineral exports—announced hours after Prime Minister Sanae Takaichi warned that a Taiwan contingency could trigger Japanese military support—has not yet shown up in the customs data. Traders confirm, however, that spot dysprosium and neodymium prices have jumped 18% in Tokyo since the restriction, raising input costs for Toyota, Sony and Renesas ahead of spring wage talks.
What the BOJ can’t fix with rate hikes
A narrower deficit normally underwrites a stronger yen, yet USD/JPY has held above 155 since the release—its weakest January level since 1998. The reason: investors are pricing a 2026 current-account swing back into deficit on:
- Higher energy import bills as the Fukushima offshore restart schedule slips again;
- Lost auto volume if the 15% U.S. tariff becomes permanent;
- An accelerated shift of battery supply chains to North America, bypassing Japanese parts makers.
Equity bulls ignore the smoke
The Nikkei 225 keeps printing record closes, but sector breadth is narrowing. December data show export-heavy machinery names underperforming the index by 470 bps, while utilities and domestic retail outperform. In yen terms, the Topix is flat since October; in dollar terms, it is down 7%. Currency-hedged ETFs (DXJS, HEWJ) have absorbed $2.3 bn year-to-date, the fastest start on record.
Three investor angles right now
- Yen shorts still payoff: Futures positioning is only 60% of the 2022 extreme; carry traders can stay long USD/JPY until 158 option barriers roll off in March.
- Auto puts are cheap: Toyota 3-month 20-delta puts trade at a 12% implied vol, 4 points below 10-year average. Tariff headlines could re-price that gap quickly.
- Import inflation plays: Look for domestic consumer staples (Asahi, Seven & i) that can push through March price hikes while input costs stay elevated.
Political wildcard: snap election Feb 28
Takaichi’s surprise February 28 election call is a bet that voters reward her security posture before economic pain lands. Polls show the LDP gaining 8–10 seats, but a weaker mandate could stall the long-promised labour-market reforms needed to lift real wages. If stimulus packages follow instead, the deficit—and yen—both widen further.
Bottom line
Japan’s 2025 books look better, but December’s export slump and China’s mineral chokepoint reveal a structural vulnerability that no single-year improvement can mask. For investors, the trade is still short yen, long domestic demand—until energy policy or diplomacy breaks the cycle.
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