The Japanese stock market witnessed significant sell-offs on Monday due to anxieties surrounding the intensified trade tariffs imposed by U.S. President Donald Trump. Nevertheless, analysts from Citi project that the downside may be limited, citing lower valuations and possible interventions from central banks.

Market Response to Tariff Announcements

The Nikkei 225 index fell by 2.3% on Monday after Trump signed executive orders to enforce 25% tariffs on imports from Canada and Mexico and 10% duties on Chinese goods. The automaking sector, including shares of Toyota (NYSE:TM), suffered significantly due to their dependency on production in Mexico.

Market conditions began to improve on Tuesday, with the Nikkei 225 making a recovery of over 1% after Trump announced a 30-day postponement of the tariffs on Canada and Mexico following successful border agreements.

Analyst Insights: Limited Further Declines Expected

Citi analysts indicated that Japanese stocks have been trading at relatively lower valuations compared to U.S. equities since October 2024. This situation offers a cushion against any potential downturns. Moreover, they foresee limited chances of Trump directly imposing tariffs on Japan ahead of the upcoming U.S.-Japan summit in February.

Potential Central Bank Support

In light of a possible extended global trade conflict, Citi analysts point out that central banks, including the Bank of Japan and the Federal Reserve, may adopt additional monetary easing measures. This influx of liquidity could be beneficial for both the U.S. and Japanese markets, which historically correlate positively.

Outlook: Navigating Uncertainty

Despite the recent recovery, analysts remain cautious about Japan’s market outlook due to uncertainties surrounding Trump’s trade strategies. Investors are closely monitoring upcoming Chinese tariff implementations and their repercussions on global trade.

In conclusion, while volatility persists in Japan’s stock market, Citi’s insights suggest that lower valuations and potential central bank interventions may help stabilize equities and create investment opportunities.