The 3 must-know news stories of the week and What We Think
1. Japan in a mixed light.
2. A mixed U.S. economy
3. United States and China: trade truce
Chart of the week
Japan in a Mixed Light
The Japanese economy is starting the year on a cautious note, struggling to regain the momentum seen at the end of 2024. According to the latest data released for the first quarter of 2025, the gross domestic product contracted by 0.2% quarter-on-quarter, whereas economists had anticipated a more moderate decline of 0.1. This marks the first drop in a year, following a 0.6% increase in the fourth quarter of 2024. This slowdown is mainly due to uncertainties surrounding international trade: the contribution of net exports fell into negative territory (-0.8% compared to +0.7% in Q4 2024), in contrast to most advanced economies which had benefited from anticipatory effects following U.S.-China trade tensions. Imports, meanwhile, rebounded unexpectedly, likely a sign of preventive stockpiling strategies among manufacturers.On the domestic demand front, household consumption remains flat: it did not grow (0% compared to the previous quarter), still reflecting an erosion of purchasing power in the face of intensified inflation, particularly in food (with rice prices surging in March). However, corporate investment offers a point of stability: it rose by 1.4% over three months, compared to +0.8% the previous quarter, which was revised upward. Year-on-year, growth remains solid (+1.6% in Q1 2025).
In diplomatic news, a third round of trade negotiations is set to begin soon between Tokyo and Washington: Vice Minister of Finance Ryohei Akazawa is expected to travel to Washington in the coming days to finalize a package including greater access to the Japanese agricultural market, the lifting of non-tariff barriers in the automotive sector, and cooperation agreements on shipbuilding. At this stage, no specific timeline has yet been confirmed. Despite this cautious environment, wage prospects could reinvigorate the economy: the upcoming increase in salaries, driven by a continually shrinking labor force and competition to attract talent in cutting-edge sectors (notably artificial intelligence and renewable energy), is expected to sustain the inflationary momentum.
Dollar versus Yen
Our View: Under these conditions, the Bank of Japan remains in a position to raise its key interest rates by 25 basis points in the third quarter (up to 0.75%), then semiannually through the end of 2026, reaching 1.25%, thereby fueling upward pressure on the yen and Japanese bond yields.Une économie US contrastée
A Mixed U.S. Economy
The U.S. economy painted a mixed picture in April, as the first effects of recent tariff hikes began to emerge. For the second consecutive month, retail sales barely exceeded expectations, at +0.1% versus the forecast of 0%. However, this slight boost in momentum masks disparities: auto sales remain particularly strong, nearly 7% above the 2024 average, supported by the 25-point tariff hike on vehicles that took effect in early April. In contrast, non-auto purchases disappointed, with only +0.1% (vs. +0.3% expected), and for the third time in four months, real sales declined — a sign of growing pessimism among households.
On the production front, producer prices surprised on the downside: –0.5% for the month, bringing the annual increase in total PPI to +2.4% in April (after +3.4% in March, revised from +2.7%). Excluding energy and food, factory-gate inflation slowed markedly to +3% year-on-year. Combined with the relative pause observed in consumer prices, this slowdown points to a more contained April PCE — a key indicator for the Federal Reserve.
Our View: This scenario could lead to a rebound in inflation toward 3% over the year, eroding household purchasing power and forcing the Fed to closely monitor the risk of inflation expectations becoming unanchored. U.S. economic data in the coming months will be crucial to better understand the effects of the sharp increase in tariffs. Indeed, the shift from an effective rate barely above 2% to one around 15% is the complete opposite of what has occurred over the past few decades and represents a plunge into the unknown. Faced with these early signs of inflation and weakening demand, the Fed is expected to maintain its current key interest rates at its upcoming meeting. In the medium term, slowing growth and consumption will dampen the labor market—another key factor for the central bank—paving the way for a rate cut by the end of 2025. 10-Year U.S. Yield Target: 4%–4.5%
United States and China: Trade Truce
After several weeks marked by a sharp escalation in trade tensions between the United States and China, the agreement reached between the two powers turns out to be more promising than expected. In a joint statement, Beijing and Washington announced a temporary suspension—lasting 90 days—of part of the tariffs implemented in recent weeks. U.S. tariffs on China will drop from 145% to 30% (including the 20% imposed since March related to fentanyl), while those applied by China on U.S. goods will fall from 125% to 10%. These new rates come on top of existing tariffs of around 20% for both countries: Chinese exports will thus be taxed at nearly 50%, and U.S. exports at around 30%.
U.S. Treasury Secretary S. Bessent welcomed the consensus between the two partners on maintaining bilateral relations and establishing a consultation mechanism to continue discussions toward a more lasting trade agreement. This compromise confirms that 10% constitutes a floor and that average effective tariffs should settle around 15% for U.S. imports (compared to approximately 2% in 2024). D. Trump also stated this past weekend that the 10% rate would be the minimum level.
Following the rapid de-escalation between China and the United States, Beijing nonetheless voiced concerns about the trade agreement reached last week between the U.S. administration and the United Kingdom. This first “deal” would penalize China by forcing British supply chains to meet “U.S. requirements.” In an interview with the Financial Times, a Chinese government adviser stated: “China will need to respond – the UK should not have rushed to agree to the deal.” The cost of shipping goods from China is rising as the tariff truce stimulates demand.
Our View: The current level of optimism prevailing in financial markets seems excessive to us, and the notion of a weakened U.S. economy has yet to be widely acknowledged. Although we remain cautious in the short term regarding emerging markets, given their positioning, which is highly dependent on the United States and leaves little room for maneuver, we are more constructive on China. Volatility will be exacerbated by the back-and-forth between tensions and easing with Washington. China retains a much stronger negotiating capacity (as evidenced by this moratorium) than in 2018. The main uncertainty now lies in Europe’s stance, about which we are moderately optimistic. It remains unclear whether the European Union will, as part of these negotiations, be forced to choose sides, aligning with D. Trump against China, and thereby enter a trade war that would be detrimental to both parties.
