UBS On-Air: Paul Donovan Daily Audio 'Who to scapegoat when trade deals are done?'
The desk emphasizes that the new trade deal between the US and Japan is likely to lead to a significant increase in costs for American consumers, as US buyers will face a 15% tariff on Japanese goods, including automobiles. Per the full note from UBS, while the deal's announcement may reduce uncertainty, the actual impact will depend on implementation, as history has shown with prior trade agreements. This scenario sets a challenging environment for US consumers who will start feeling the effects of these tariffs in the coming years. In light of these complexities, traders should remain vigilant as the ramifications of these policies unfold in the FX market.
What the desk is arguing
The desk asserts that the US-Japan trade deal will impose increased costs on US consumers and could influence market dynamics as tariffs rise. This is further supported by comments from UBS Chief Economist Paul Donovan, noting that the anticipated 15% tax is just the starting point for trade-related charges.
The implications of these tariffs will likely be felt more acutely by January 2026, as Donovan suggests that trade taxes take time to filter through the supply chain. Therefore, as US consumers absorb these costs, it could catalyze shifts in consumption patterns and impact trade balances.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a forecast range of 1.04 to 1.12. Notable firm targets include: - jpmorgan at 1.10 for Mar-26 - bofa at 1.04 for Mar-26
This desk's position appears aligned with the upper end of the expected range as outlined, indicating a cautious optimism regarding the USD given the possible tariff implications.
How other firms see it
Firms like jpmorgan and bofa share views on mitigating the immediate risks posed by the tariffs, albeit with varying targets. While bofa takes a more conservative stance, jpmorgan aligns with the belief that the US dollar could strengthen under these conditions.
As tariffs come into play, watch the USD/JPY pair closely; shifts in trader sentiment in response to changes in trade dynamics could induce volatility in this pair as the economic implications of the tariffs unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0115% tariff on Japanese goods will inflate costs for US consumers.
- 02The implementation timeline suggests effects can be felt as late as January 2026.
- 03Tariffs may reshape US consumption and trade balances.
- 04Expect volatility in FX markets as the implications of trade agreements evolve.
Market implications
Traders should watch for fluctuations in USD/JPY, particularly as new data reflects the economic effects of the implemented tariffs and shifts in consumer behavior due to increased prices.
Risks to this view
Reversal of this outlook could occur if Japan's response to the tariffs results in unexpected policy adjustments or if the US administration significantly alters its trade strategy, potentially softening the tariff burden.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 5.30 in the morning London time on Wednesday the 23rd of July. A moderately interesting day in Japan.
US President Trump posted on social media that a trade agreement had been worked out with Japan. Social media is not, perhaps, the best platform for communicating the complex and nuanced nature of trade agreements, and, of course, doing a deal and actually implementing a deal are not the same thing, as the UK steel industry can testify. However, it seems like US buyers of Japanese product will have to pay 15% more for the privilege, and this will include Japanese autos.
In exchange, there are vague pledges about Japan investing in the United States, which will be extremely difficult to enforce, but sound impressive, and can probably be justified by presenting existing investment plans as being in reaction to the deal. There were also some comments on opening up the Japanese markets. Meanwhile, having seen the deal conclude, there are now media reports that Prime Minister Ishiba will resign in August.
This is unlikely to impact financial markets immediately, as investors will want to assess the probability of any successor being able to change policy direction, given that the governing coalition lacks a majority in either house of the Diet. So far, the pattern of trade deals with the United States confirms that the tax burden on US companies and consumers will rise significantly, and a 15% effective tariff rate is probably the minimum tariff rate that will now emerge. This is something that consumers are starting to feel, but the full effect of the latest round of tax increases on US consumers is likely to be felt only in January of 2026.
Because trade taxes occur relatively high up the supply chain, the tax burden does take some time to filter down. However, the trade deals do reduce some of the uncertainty that has been plaguing US and to a lesser extent international businesses. After holding back on investment and hiring, US firms are now starting to have more clarity about what happens next.
Whether what happens next induces more investment and hiring is the critical point in determining how severe the US economic downturn is to be. This does all assume that there are no further waves of policy uncertainty, either around trade or around federal government policy. Some caution is needed here.
The point about scapegoat economics and prejudice politics is that there needs to be someone else to blame when fear levels rise or when things go wrong. If trade deals are universally concluded, then foreigners become less of a scapegoat if things go wrong with the economy in the future. If scapegoats are needed as the US economy slows and inflation rises, the temptation to go back to blaming foreigners and challenging some trade agreements cannot be assumed to be a zero possibility.
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