US-Japan Trade Deal Slashes Tariffs and Sparks Market Rally

A historic trade pact eases tensions and sends stocks soaring. But will Europe’s retaliation derail the momentum?

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2025 December 26 . 3:13 PM

1 min read

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US-Japan Trade Deal Slashes Tariffs and Sparks Market Rally

The US and Japan have finalised a significant trade deal that cuts tariffs on Japanese cars and bolsters American agricultural exports. Under the agreement, Japan will invest $550 billion in the US, including defence contracts and aircraft purchases. The deal has already lifted markets, with Japan’s Nikkei index climbing to a one-year high.

The new agreement reduces tariffs on Japanese automobile exports from 27.5% to 15%. This follows earlier threats from US President Donald Trump to impose a 25% levy on Japanese cars. The automotive sector makes up over a quarter of Japan’s exports to the US, with bilateral trade totalling nearly $230 billion in 2024.

Japan has also committed to buying $8 billion worth of US agricultural products, increasing rice imports by 75%. Additionally, new tariffs on other Japanese goods, due in August, will be capped at 15%. As part of the deal, Japan will spend $17 billion annually on US defence equipment and purchase 100 Boeing aircraft. The announcement triggered a market rally, with Toyota and Honda shares rising sharply alongside the Nikkei’s 4% jump. Meanwhile, the European Commission is preparing countermeasures, weighing retaliatory tariffs on $93 billion of US imports after earlier US tariff threats.

The trade deal lowers tariffs on Japanese cars and secures major US agricultural sales. Japan’s $550 billion investment includes defence contracts and aircraft orders, while markets have reacted positively. The European Commission, however, is now considering its own tariffs in response to US trade policies.