18-04-2025
Tokyo broker advises Trump-proofing portfolios with Godzilla-creator Toho
The Tokyo stock market has been the worst performing major equity market year-to-date, in part because Japan's exporters have been hit hard by tariffs. Toyota, the country's largest company, is down 16%. The Nikkei 225 stock index is off about 12%.
What's missing in this picture is a Japan that is often overlooked, a Japan of companies that aren't so reliant on overseas demand, those that sell domestically or are in businesses otherwise insulated from tariffs on goods.
Brewers, bakers and utilities are some of the companies that tend to hold up better when the export economy is under threat. Retailers and railroads also do well, while analysts are especially bullish on entertainment stocks in this environment.
Companies that performed well as Trump tariffs were rolled out and might continue to do well if the trade war becomes protracted include: Yamazaki Baking, Japan's largest baking company; West Japan Railway; Aeon; Marui Group; and Tokyo Gas.
'It's a high-risk situation to invest in manufacturing shares, so there is a clear trend where domestic-demand stocks are being favored over foreign-demand stocks now," said Eiji Sato, portfolio manager at Nakano Asset Management.
Earlier this month, U.S. President Donald Trump unleashed a round of brutal tariffs on products entering the United States. Most imports from Japan are being hit with 10% duties, while steel and cars are attracting higher rates. Exporter stocks are down as a result, and because they are so large, they are pulling the index down with them.
In addition to Toyota, shares of other carmakers have declined, as have the shares of electronics companies such as TDK and Tokyo Electron, and those of steelmakers.
Brokers are cautioning investors that the bet is not so simple. Tariffs are already priced into stocks, and negotiations with the United States are ongoing. It is very possible that an agreement will be reached, or that Trump simply chooses to lift some tariffs for Japan.
The panic-selling phase seems to be over, so investors might want to be careful about shifting too much to domestic-demand stocks, noted Chisa Kobayashi, an analyst at UBS SuMi Trust Wealth Management.
'While focusing on a defensive strategy, we think it's good to maintain some exposure to foreign-demand shares; otherwise, there would be a risk of missing out opportunities once the market starts rallying again,' she added.
It is also possible the tariffs stick or that the situation worsens. The United States suspended 24% "reciprocal" tariffs on Japan for 90 days, and that rate could kick in again in July.
Solutions proposed by the United States might weigh on exporters as well. The appreciation of the yen in a possible Plaza Accord 2.0 would be particularly troublesome for companies that depend on selling into the U.S. market.
Sato listed Cosmos Pharmaceutical, an operator of discount drugstores, and Kobe Bussan, which runs wholesale supermarkets, as potential winners in a trade war that drags on. He also said Nakano Asset Management is over-weighting companies with core businesses not likely to be affected by the trade war and with long-term growth potential.
Given that the popularity of Japanese anime has been growing considerably in recent years, entertainment businesses appear promising, and soft content would be less affected by tariffs.
Sony owns Crunchyroll, which is a popular streaming platform for overseas anime fans, along with running other entertainment businesses. With this portfolio, it can create synergetic effects, Sato argues. It can make anime movies and anime theme songs. Its video games can be on the PlayStation platform as well.
"If tariffs are imposed on gaming hardware, the impact would be unavoidable, but we believe the expected growth of Sony's intangible assets would more than make up for it," Sato said.
He also mentioned Toho, creator of Godzilla and distributor of hit anime movie series including "One Piece" and "Dragon Ball." The company has strengthened its capabilities to produce anime content in recent years. Toho shares are up by one-third since the beginning of the year.
Prior to the announcement of Trump tariffs, shares of Japanese banks were generally seen as promising, since the Bank of Japan has been intending to raise rates, which can boost bank profits. But the central bank may now slow the pace of rate increases given the threat to economic growth.
'We think investor appetite for banks has declined quite a bit,' Kobayashi said.
For the next several weeks, investors should pay attention to whether companies release earnings projections for this fiscal year, analysts argue.
"I think some companies might not disclose earnings guidance under the current situation, but those that do provide guidance will probably be viewed more favorably by investors,' Kobayashi said, adding that companies that didn't issue guidance during the pandemic underperformed later.
