U.S.-China Rift Will Welcome Back Japan Traders

(Bloomberg) -- As Japan's investors come back to work on Thursday after their Golden Week holiday, they'll get to trade on the latest extension in the state of emergency and escalating tension between the U.S. and China. But everything points to a muted market open:

• Nikkei 225 futures trading in Singapore are little changed since the underlying benchmark last traded on May 1
• The U.S.-listed iShares MSCI Japan ETF has gained 0.5% in the period
• While the yen has ticked up 0.5% this week with heightened risk-off sentiment, it remains around 106 per U.S. dollar.

The quiet reaction on Japanese assets during the holiday shows investors have largely shrugged off the extended restrictions to help fight the coronavirus outbreak. That seems fair, given that the nation has never been in a strict lockdown such as those imposed in China and India -- a large part of Japan's economy is still functioning.

But caution is warranted, some market participants say, especially as geopolitical risks loom large. While concerns over the virus impact remain, Asian traders are dusting off their trade-war playbook after U.S. President Donald Trump warned that tariffs would be the “ultimate punishment” for China's handling of the outbreak.

Last year, the trade war between the world's two largest economies particularly hit Japanese equities. The Topix index lost more than 7% in about a month after Trump said he would increase levies on $200 billion of Chinese goods. The gauge then hit an almost eight-month low in August, after he tweeted about additional tariffs on the nation's imports. Later, as optimism over a phase-one deal grew, Japanese equities became some of the world's best performers, further highlighting the strong impact that the trade war had on them.

“This whole trade-war narrative remains noisy and uncomfortable for the risk market in general,” said Stephen Innes, chief market strategist at AxiCorp Ltd. “It doesn't make for a comfortable lift-off point for stocks -- Japanese stocks included.”

Here are some other points investors may watch after the Japanese market reopens:

• Earnings releases of companies including Nintendo Co., Nippon Telegraph & Telephone Corp.
• Stock-price reaction for Canon Inc. after its president, Masaya Maeda, stepped down.
• Post-earnings moves for companies including Nomura Real Estate Holdings Inc., Enplas Corp. and Kyowa Kirin Co.
• SoftBank Group Corp.'s stock reaction as its international arm is said to have cut roughly 10% of its staff.

©2020 Bloomberg L.P.