Policy: Rising Sun, Rising Rates?
Economic indicators are looking up for Japan, although political uncertainties preclude immediate interest rate hikes.
It might seem at times rare that we discuss good news on these pages but with everything going on in the world we’re certainly overdue some. For that we must turn to Japan, where economic indicators are thankfully going in the right direction.
First, and most obviously for those with an eye on the stock market, it’s been a great week for the Nikkei. The index reached a record high on Tuesday and has continued to perform strongly throughout the week, as the 90-day extension of the US-China tariff truce supported Asian indices more broadly. However, that’s not to say Japan hasn’t had any good news of its own – it has. Growth has been on the up, with government data released on Friday revealing Japan’s economy expanded an annualised 1.0 per cent in the second quarter, translating to quarterly growth of 0.3 per cent. This marks the fifth straight quarter of expansion, and Friday’s figures are well above median market expectations of 0.4 per cent year-on-year. Private consumption, accounting for over half of Japan’s economic output, rose 0.2 per cent, at the same pace as Q1, but above market estimates of 0.1 per cent.
Japanese exports have been especially strong, gaining 2 per cent in Q2, and car sales have driven much of this growth. Exporters’ rushing out of sales in the post ‘Liberation Day’ tariff hiatus has certainly contributed, although Japanese car manufacturers have also adapted to US tariffs by absorbing costs and cutting prices to keep domestic plants running. How viable this will be in the long term remains unclear, and it will be interesting to see how Tokyo adapts to its new 15 per cent tariff rate. For now, the deal seems to have gone down well, with a Reuters poll on Thursday revealing that three-quarters of Japanese firms have a positive view of the deal with Washington.
The strong GDP figures have been good for the Yen, which was up 0.4 per cent on the dollar on Friday and which has gained nearly 0.5 per cent on the greenback over the week. As for inflation, Japanese core inflation last month is expected to have slowed from June’s 3.3 per cent, at 3.0 per cent on the year, with lower energy costs largely responsible. However, inflation overall, which has exceeded the 2 per cent target for three years now, remains an issue, as companies offset rising material and labour costs onto consumers, driving goods inflation up.
Stubbornly high inflation might be a fly in the ointment for Tokyo, but together with better-than-expected economic growth and a strong currency, the BOJ’s decision-making process on interest rates should in principle be made easier. Interest rates should be going up, and BOJ Governor Kazuo Ueda has signalled readiness to raise them, though has justified slow-rolling hikes on the grounds that domestic demand and wage inflation remains below the BOJ’s target. The Bank’s next rate decision is due for September, and whilst Ueda might have reasons for holding back on hikes for the moment, his course of action has not gone without scrutiny. Apparently not content with opining on interest rate decisions domestically, the Trump administration has made clear its view of the matter, with US Treasury Secretary Scott Bessent suggesting the BOJ had been “behind the curve” – a charge Ueda rejects.
Behind the curve Japan might (or might not) be, but that doesn’t mean a change is coming any time soon. Prime Minister Shigeru Ishiba remains under pressure from within the Liberal Democratic Party to step down and take responsibility for the party’s poor electoral performance, including a huge defeat in July’s upper house election. Ishiba has insisted he has no plans to resign, but questions have inevitably surfaced about the sustainability of his tenure and lawmakers on Friday decided to consider holding a leadership challenge, which could occur in September at the earliest. Proponents argue a swift change at the top could allow the new administration to put together a spending package to cushion the impact of tariffs, although if the leadership race is delayed, it might have to wait till early next year. Ishiba already holds a weak position, having lost control of both houses, and with opposition parties ruling out forming a coalition unless Ishiba steps down, it looks like his time is numbered. Obviously, any change in Japan’s leadership could lead to the government taking new economic priorities, complicating the course of action for the BOJ. Ishiba has supported the central bank’s strategy of weaning the economy off stimulus, although with his weakening at the election, and potential replacement, an enthusiastic supporter of the bank’s policies has been lost. By contrast, opposition parties, and even some in the LDP’s own ranks, have urged the BOJ to slow down, or even hold off, raising interest rates in favour of supporting economic growth. Leaving aside the fact that a drastic interest rate decision could make life difficult for a new government, the BOJ’s preferred action could put it at loggerheads with a new PM – not an outcome either would want.
The next few months could be critical for Japan. Yes, Tokyo has done the hard work of getting a tariff deal with the US done ahead of the deadline. And yes, as indicators show this week, there are good reasons to feel optimistic about the world’s fourth-largest economy. But Japan needs to ensure it can effectively adapt to tariffs and maintain its growth rate, as well as sorting out its political leadership so the BOJ can confidently raise interest rates.
Oil: Stakes High In Washington
Talks between Trump, Zelensky, and European allies could change the course of the Russia-Ukraine war and affect oil supply and trade.
There was much anticipation ahead of Friday’s meeting between US President Donald Trump and Russian President Vladimir Putin in Alaska. Russian sanctions, direct and indirect, have a large impact on the oil and tanker markets, and broader trade patterns, so many were interested in whether Trump would add more – as he had threatened to do in preceding weeks – or lift some, which would have been consistent with his warm feelings towards Putin.
The meeting was not followed by an announcement about additions or reversals of sanctions, and nor was a ceasefire reached, despite Trump’s repeated claims that one was close to being finalised.
Still, there were symbolic wins for Russia, starting with the fact that Ukrainian President Volodymyr Zelensky was not invited to the summit. The US literally rolled out a red carpet for Putin, and his presence in the US was itself a sign that Trump rejects the hostility which other western nations have shown Russia in recent years.
On the other hand, while it is true that Putin was treated with unusual respect and no ceasefire was reached, hope is not all lost for Zelensky. On 18 August, he is due to meet Trump in Washington, D.C., first bilaterally and later accompanied by European leaders including British Prime Minister Keir Starmer and French President Emmanuel Macron. NATO Secretary General Mark Rutte will also attend.
Some boundaries have already been set for the meeting, as Trump has promised that Ukraine will not be allowed to join NATO or recover the Crimean Peninsula. He shares Putin’s wish for territorial concessions before a ceasefire is reached. He has said that Zelensky could end the war “almost immediately, if he wants to”.
Adding to the mixed signals, Special Envoy Steve Witkoff has announced that the US is committed to offering Ukraine security guarantees, and it seems that some progress has been made on the way to a peace deal. Security measures preventing a future Russian invasion of Ukraine are reportedly on the agenda for the talks on 18 August.
The meeting could, once again, determine the near future of Russian sanctions. The presence of several high-profile European leaders is significant because European countries have been urging Trump to take Ukraine’s side in general and have placed particular emphasis on the introduction of new financial penalties.
The EU itself has imposed 18 sets of sanctions on Russia, the most recent having been released in the middle of July along with the lowering of the price cap on Russian oil. Ever since, they have been pressing Trump to impose new, more direct ones, because theirs are not likely to have an extremely damaging effect without US collaboration.
In early August, Trump set a whopping 50 per cent tariff rate on India, half of which he claimed was retaliation for the purchases of Russian oil, so the President is not totally averse to financial punishment. Treasury Secretary Scott Bessent said a few days before the summit that, should it go badly, higher tariffs could be imposed on India.
In response to these new economic restrictions, several Indian refineries paused production and cancelled deliveries of Russian crude, at least until they had more clarity about the financial viability of continuing to rely on it.
Since Russia is not known for being submissive, a ceasefire would probably include sanctions relief, partly because many sanctions were imposed specifically in response to Russia’s actions in Ukraine since February 2022. This would amount to a sudden leap in global legitimate oil supply, which would likely bring prices down, barring any other transformative developments.
Russia is known to renege on its promises, particularly involving Ukraine; in 1997, the “Treaty of Friendship, Cooperation, and Partnership between Ukraine and the Russian Federation” included a vow to respect existing borders, but Putin is clearly not abiding by the agreement and has failed to do so for over a decade.
As a result, no matter what the agreement includes, many countries, which have shunned Russian oil since its latest invasion of Ukraine, will likely not trust it to keep its word and will therefore be reluctant to increase their imports of Russian oil by a significant amount. Some changes, in sum, cannot be reversed by the 18 August meeting.
However, the question of sanctions remains. As recently as the last few weeks, they have changed the way India’s oil industry operates. It has also been shown that Russian oil has the ability to affect a country’s trade relationship with the US more broadly. The resolution to the war in Ukraine is thus very relevant to the industry, and the 18 August talks might set the tone for the resolution of the conflict.
Sources: Reuters, BBC, Financial Times, CNN
Dry Cargo: Heavy Metal Politics
The US has expanded its 50 per cent tariffs on steel and aluminium, reshaping trade flows and supply chains.
The US aluminium and steel sectors are undergoing a profound shift as President Donald Trump’s administration doubles down on tariffs. In 2025, duties on imported primary metals were raised from 25 to 50 per cent and extended to hundreds of derivative products, reshaping trade flows and supply chains. While the aim is to revive domestic smelting and curb reliance on foreign producers, the ripple effects are complex: Canadian exports are being diverted, global partners are seeking carve-outs, and recycling is emerging as an unexpected winner. Together, these developments highlight both the economic strain and strategic recalibration of US trade policy.
The US Commerce Department has expanded its 50 per cent tariffs on steel and aluminium, adding 407 new product codes to the Harmonised Tariff Schedule. Effective 18 August, these derivative items will face the same duties, with only the metal portions taxed, while non-metal components remain subject to regular country-specific rates. The move builds on the Section 232 “inclusions” process, designed to prevent downstream products from sidestepping tariffs.
The step highlights Washington’s deepening protectionist stance. Politically, the timing aligns with President Trump’s active trade agenda, including talks with Russia and signals of further action on semiconductors. The phased escalation mirrors earlier strategies in pharmaceuticals, gradually raising import costs to promote domestic production.
The economic consequences could be significant. Importers and manufacturers face heavier compliance burdens, forcing supply chain realignments and potentially favouring local sourcing. However, a consequence could be slower global trade flows and higher consumer prices across manufacturing-heavy sectors.
This policy builds on earlier 2025 hikes that doubled steel and aluminium tariffs from 25 to 50 per cent and extended coverage to appliances and derivative goods. Combined with reciprocal and sector-specific duties on copper, autos, and semiconductors, the measures underscore Trump’s “America First” strategy.
Canadian aluminium producers have already shifted strategy. Alcoa, with smelters on both sides of the border, has redirected more than 100,000 T of Canadian metal to non-US buyers. Imports of primary aluminium surged to 442,000 T in March as suppliers rushed ahead of the first tariff deadline, but volumes slumped after June’s surprise hike, with May imports at their lowest since late 2022. Canada, traditionally the largest US supplier, has diverted uncommitted volumes to Europe, while aluminium scrap imports, subject only to lower reciprocal tariffs, have risen 40 per cent y-o-y. Increased flows from Europe have already triggered EU monitoring and potential restrictions.
Market dynamics reflect the strain. The US Midwest premium has jumped from USc 24 per lb in January to USc 68, though Alcoa estimates USc 70–75 is needed to offset tariffs and transport costs. Buyers remain cautious, drawing down inventories while awaiting possible exemptions.
Relief may ultimately come through trade deals. The UK and EU have secured carve-outs and talks of a broader “metals alliance” suggest tariffs could eventually give way to quotas, a system that would likely include Canada.
For now, however, US smelting capacity remains constrained. Idled plants are costly to restart, and new smelter projects face stiff competition for affordable power. Until tariff policy becomes clearer, further restarts appear unlikely, leaving supply chains vulnerable to volatility.
At the same time, tariffs are reshaping the industry in unexpected ways. Rather than reviving US smelters, the 50 per cent aluminium duties are fuelling a boom in recycling. With primary aluminium prices elevated, manufacturers are turning to recycled metal, which avoids tariff costs, requires just 5 per cent of the energy, and fits growing sustainability goals. Scrap exports have collapsed as domestic demand surges, with recyclers profiting from tariff-driven premiums. Recycling could offset nearly half of the US’s 5.5 Mn T import deficit. New recycling plants, far cheaper and quicker to build than smelters, are attracting investment, positioning recycling as both cost-effective and environmentally aligned with industrial policy.
Source: Reuters
LNG: The Hidden Hiccup
Despite record supplies catching up with increased demand, prices keep rising. Here’s why.
US LNG exports have shattered records again this year, with rising prices failing to dampen demand and a strong outlook ahead. However, there's a snag: pipeline infrastructure.
Between January and August, US LNG exports surged by 22 per cent compared to the same period in 2024, according to Reuters. Total exports reached 69 Mn T, an increase of 12.4 Mn T over last year.
The report underscored a sharp uptick in domestic natural gas usage, driven largely by corporate and industrial demand, pushing prices higher within the US, though they are still fall well below the peaks seen in 2022 and 2023.
European buyers remained unfazed, however, as US LNG exports to the region soared by 61 per cent year-over-year. This sharp increase was fuelled by significantly depleted gas reserves following the latest heating season, prompting higher replenishment needs; reduced output from wind and hydropower sources; and the EU’s commitment to ramp up US energy purchases in an effort to narrow its trade surplus with Washington.
The financial impact of Europe’s rising LNG imports has yet to fully materialise. Still, the region continues to snap up US supplies, even as prices averaged USD 8.34 per thousand cubic feet over the first eight months of the year.
Last week, UK-based Centrica Energy entered into an agreement with US firm Devon Energy Corporation for the latter to supply the former with 50,000 mmBtu per day of natural gas over 10 years starting in 2028 – equal to five LNG cargoes per year. The price will be indexed to the TTF price, giving Devon exposure to European gas prices.
According to the EIA, prices are likely to climb further, driven by growing demand from data centers and LNG exports. The agency anticipates this upward trend will become more pronounced during the upcoming winter and into next year.
Typically, rising prices stem from a mismatch between supply and demand. And while demand for US natural gas is climbing sharply both domestically and internationally, the assumption would be that supply is lagging. Yet, paradoxically, supply is also hitting record highs.
Reuters, citing LSEG data, reported that natural gas output in the Lower 48 rose to a record 108.1 bcf per day in August, surpassing July’s high of 107.9 Bn. Yet, with demand hitting 111.9 bcf this week, supply still trails. It should be catching up but there’s a bottleneck: pipelines.
Industry leaders have long warned that LNG export growth hinges on new pipelines to move gas from fields to liquefaction plants. Cheniere Energy, the top US LNG exporter, reiterated this concern, emphasising that transportation – not supply – is the real challenge.
With several new Gulf Coast liquefaction facilities under construction, pipeline development is lagging, raising questions about how these plants will secure the volumes they need.
A lack of pipeline capacity could slow the US LNG boom and temper rising prices. The EIA forecasts Henry Hub prices to average USD 3.90 per mmBtu in Q4, up from USD 3.20 in July, and reach USD 4.30 in 2026. It attributes the rise to flat production amid growing LNG exports, with limited pipeline expansion seen as a key constraint.
An added challenge stems from the Trump administration’s push for LNG carrier self-sufficiency. Under new USTR proposals, starting in 2028, 1 per cent of US LNG exports must be transported on US-flagged vessels. From 2029, that requirement extends to US-flagged and US-built ships despite none currently existing.
Currently, only one US-flagged LNG tanker is in operation. Industry experts warn that mandates for US-built carriers could hinder export growth, as building them domestically may cost two to four times more than in South Korea or China.
Sources: OilPrice.com, Offshore Energy
Container: Beijing Never Forgets
As transpacific rates continue to fall, China is planning for a long-term future in which the US plays a smaller role.
It is now a question of “by how much?” – “by how much further will container spot rates fall?”
The frontloading of earlier this year is well and truly over. Although the US and China struck a last-minute 90-day extension of their trade war trace through to 9 November, this time around, there was no such surge in orders.
Although the truce ensures that the tariffs imposed on one another are more “manageable”, the US has still slapped an average of 50 per cent duties on all Chinese imports, a figure which is still deterrently high. Those US importers that are more price-sensitive will be avoiding Chinese-manufactured goods where possible, while those that had little choice already pounced as soon as the original truce was agreed.
There is no pent-up demand and rates reflect that. Last week, transpacific spot rates tumbled for their ninth straight week. According to the Shanghai Containerised Freight Index (SCFI), rates on the Shanghai – US West Coast route fell 4 per cent on the week down to just USD 1,759 per FEU, the lowest assessment since 8 December 2023. On the year, this was a sizeable fall of 73 per cent.
Similarly, rates on Shanghai – US East Coast fell to their lowest since 8 December 2023, shedding 3 per cent last week down to USD 2,719 per FEU. Compared to last year, this marked a drop of 71 per cent.
Having said that, volumes between the US and China have not dried up entirely. According to Nathan Strang, director of ocean freight for the US southwest, reports that there are “good overall booking volumes”, and that “there’s also no sense of a complete lull in the market”.
It then becomes a question of capacity management to shore up rates as much as possible.
Meanwhile, trade between Asia and Europe continues to offer some hope. While there is little prospect of the traditional peak on China – US routes, the Asia – Europe is experiencing its typical Q3 increase. In July, demand rose sizeably, taking rates up with it and, although volumes in August have fallen from these highs, market fundamentals remain balanced.
Congestion remains elevated in Europe, constricting supply. In northern Europe, delays at ports are around nine+ days, according to Strang, while they are around five days in the Med. Strang said that the delays could extend all the way through towards the end of the year because of the persistent level of cargo volumes entering the continent, meaning no let-up.
However, Asia – Europe rates continue to slide. The SCFI’s Shanghai – North Europe index assessment fell to USD 3,640 per FEU at the end of last week, a drop of 7 per cent, while the Shanghai – Med index fell by 2 per cent down to USD 4,558 per FEU.
Yet, as time goes on, it becomes increasingly probable that China’s newfound focus not just on Europe, but also on the Middle East and other Asian countries, may not be just temporary. In lieu of the US, Chinese exports have been directed elsewhere and, rather than fall or stagnate, Chinese exports have actually increased.
In other markets, notably grains and crude oil, previous iterations of the trade war caused China to turn elsewhere for imports. In Trump’s first term, he agreed a deal with Beijing that would see the latter promising to increase imports of US soybeans, corn and crude oil. Yet, after an initial flurry, not only did imports fall, they dried up almost completely.
Instead, China imported grains from South America, particularly Brazil, while raising imports of crude oil from the Middle East and – since 2022 – Russia. Those previous trade patterns pre-Trump 1.0 were never restored, and we may see a similar development going forward with Chinese exports.
Inevitably, as has been the case since Trump signed off on his first tranche of tariffs, it will be the American consumer who pays the biggest price. China is demonstrating its resilience and ability to survive, even if the US slaps significant tariffs on its imports, so US businesses – and by extension their customers – will have to pay more for their imports, whether they be from China or from higher-priced alternatives.
Sources: Lloyd’s List, TradeWinds