Crisis in Japan: Here’s What Traders Should Know

After the end of World War II, Japan emerged as one of the most stable economies in the world. This led to the Japanese yen being considered a safe haven asset. But 70 years on, the economy seems to be in deep trouble, with cracks appearing on multiple fronts. Japan’s bond market is collapsing, while the nation faces inflationary pressures for the first time in decades. Add to that the Trump tariffs and a growing debt burden, and we see a convergence of factors that could lead to a serious economic crisis for Japan.

Here’s a deep dive into the state of the Japanese economy and what traders should know to make informed decisions.

The State of Japan’s Economy

Japan’s GDP shrank 0.7% in the first quarter of 2025, on an annualised basis, while inflation was up 3.5%, surpassing the Bank of Japan’s (BoJ) target of 2%. In addition, food prices are on the rise, up 6.5% y-o-y in April 2025. The price of rice, a staple food in Japan, has nearly doubled due to rising inflation and supply shortages, creating a “rice crisis.” This is impacting household budgets and leading to rationing in some stores. Convenience stores have also increased the price of rice-based products like onigiri and bento boxes.

One of the challenges the Asian nation is facing is an aging population that is leading to a shrinking working-age population. The problem is compounded by Japan’s declining birth rate, which will eventually put a strain on the nation’s labour force. Meanwhile, the BoJ is gradually increasing interest rates after a long period of negative rates, which is affecting borrowing costs and potentially impacting the yen’s value. The central bank started raising interest rates in March 2024 for the first time in 17 years. The BoJ kept the rates steady at 0.5% at its May 2025 meeting.

Even while the nation struggles to deal with all these internal pressures, external pressures are rising following the imposition of 25% tariffs by the US on Japanese automobiles, along with a 10% tariff on other imports. President Trump has also threatened a potential 24% reciprocal tariff if a trade deal is not reached between the US and Japan by July 2025. Tariffs are bad news for an export-dependent country. The problem is compounded because the US is Japan’s biggest export market. In 2024, Japan’s exports to the US totalled $141.52 billion.

The automobile sector, one of the largest contributors to Japan’s economy, faces the highest tariffs. As a result, Toyota Motor Corp expects the tariffs to cost it $1.3 billion in just two months. Nissan Motor intends to close domestic manufacturing and move its production to the US. Toyota’s stock was down over 15% YTD, while Nissan’s stock had declined more than 24% YTD by mid-June 2024.

The tariffs are doing more than just hurting company profits. They are weighing on market sentiment, making monetary policy more complex for the BoJ and giving the government little room to manoeuvre in response.

Another major area of concern for the global markets is Japan’s huge government debt. The nation’s debt-to-GDP ratio stood at 236.70% in 2024. This raises concerns about the sustainability of government finances and the potential for future fiscal challenges. Some analysts are even comparing it to Greece’s situation. Plus, the large government debt can limit the Bank of Japan’s ability to raise interest rates significantly, since higher rates would increase debt servicing costs.

Impact of Japan’s Crisis on the Financial Markets

The macroeconomic environment is weighing on the Japanese stock market and yen. The Nikkie 225 index was down 2.58% YTD while the USD/JPY had risen 9.14% YTD by mid-June 2025. The USD/JPY is the second most liquid forex pair, accounting for 13% of the total transaction volumes in the global forex market. While a weak yen is beneficial for exporters, it can lead to increased import costs and inflationary pressures, potentially impacting consumer spending. Shifts in Japanese capital flows, both domestically and internationally, can affect global asset prices, particularly in sectors that have benefited from Japanese investment. 

The Japanese yen has steadily been weakening since the beginning of 2025, partly due to expectations of delayed rate cuts by the US Fed and the strength of the American economy. Goldman Sachs expects the Japanese currency to remain “at or above 150 to the dollar” till May 2026. 

Meanwhile, Morgan Stanley has observed a shift in investor behaviour in Japan, with Japanese households shifting to owning stocks and other higher-risk assets from traditional cash savings. This trend is likely to have been driven by a focus on protecting portfolios against inflation. “Movement from savings to investments is strengthening among younger people, who are less trapped in deflationary thinking and more likely to receive long-term investment benefits,” stated Koichi Sugisaki, strategist at Morgan Stanley.

How Does This Affect Your Trading Strategy

During such times of uncertainty, experienced traders focus on diversifying their portfolios beyond traditional Japanese assets and consider investments in sectors that are less sensitive to currency fluctuations or interest rate changes. They also explore hedging strategies to mitigate the risks associated with a weaker yen or potential volatility in Japanese markets.

Japan’s economic challenges are long-term and require a patient, long-term investment approach. Therefore, it is important to closely monitor key economic indicators, such as inflation, interest rates, currency movements and developments in Japan’s fiscal and monetary policy.

Having said that, the state of Japan’s economy also presents trading opportunities. For instance, a weak yen benefits Japanese exporters, particularly in sectors like automobiles, electronics and robotics. Plus, the nation’s technology sector has attracted significant investment. While it is vulnerable to capital flow changes, it also presents growth opportunities.

Contracts for Difference (CFDs) have emerged as a popular means of capturing opportunities in both rising and declining markets. These derivative instruments involve an agreement to exchange the difference in price from the start of the contract to its closing date. This means traders can speculate on both price increases and declines. Risk management is crucial while trading with leverage via instruments like CFDs.

To Sum Up

• Japan’s GDP shrank 0.7% on an annualised basis in Q1 2025.
• Overall inflation stood at 3.5%, while food inflation reached 6.5% in April 2025.
• The Japanese labour force is shrinking due to an aging population and declining birth rate.
• The Trump tariffs are expected to hurt the economy, especially the automobile sector.
• Japan’s debt-to-GDP ratio had increased to 236.70% by 2024.
• The Nikkie 225 has declined YTD while the Japanese yen has weakened against the USD.
• Investment behaviour in Japan is shifting due to the economic crisis.
• Traders need to diversify their portfolios during such uncertain times.
• Hedging strategies are also useful.
• A long-term approach with a focus on economic releases is important.
• CFDs allow traders to capture opportunities in both rising and falling markets.

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