Who’s paying for the trade war, the BoJ’s daring game of patience and equity markets – bubble or boom ?

Our analysis suggests that US manufacturers are absorbing higher costs for less than 25% of products (and mainly in the agrifood sector), likely due to strong domestic competition and price-sensitive consumers in those categories. Meanwhile, US retailers and wholesalers have maintained sales and margins at fair levels, implying that they have not been supporting tariffs whatsoever. Foreign producers have been squeezing their margins to some extent. Indeed, though the overall US import price index was at the same level as a year before in August 2025, import prices were down for about a third of products, including computers and electronics, suggesting price moderation, especially in consumer goods mostly sourced in Asia. Lastly, we find that the US consumer is also feeling the pass-through of tariffs and potential opportunistic price hikes as we estimate that tariffs and other domestic factors added roughly 0.1pp to CPI inflation between March and August 2025. In particular, we estimate that consumers have been paying an extra 3.6% for goods like furniture, and an extra 1.2%-2.3% on cars, apparel, jewelry and footwear. Looking forward, price pressures will continue to build and permanent tariffs on goods and key inputs will make it hard for retailers and US manufacturers to hold the line on cars, electronics, furniture and textiles in H2 2025. Retail sales growth is expected to slow to just under +2% next year and retail volumes to expand by only 1–3% as more pass-through to consumer prices is underway.

We expect the Bank of Japan to stay put at this week’s monetary policy meeting, with the next move in its cautious rate-hiking cycle likely in January 2026. By then, it will gain further visibility on the negative impact of US tariff hikes, next year’s wage increase momentum and the domestic political situation. We expect the LDP-Komeito coalition to continue leading a minority government and a new Prime Minister should be appointed by mid-October. Meanwhile, uncertainty and the BoJ’s balance sheet reduction fueled the recent surge in Japanese government bond yields: +240bps for 30y and +150bps for 10y (resulting in an unprecedented 10y30y steepness of 160bps). With uncertainty now largely priced in (and likely receding) and QT exerting barely an additional pressure of c.25bps in the next two years, we expect the 10-year yield to hover around 1.6% and the 10y30y steepness to return to 120bps in the coming months. But if Japanese yields spike (e.g. another +100bps in the 10-year yield), global markets could be at risk of a liquidity squeeze and meltdowns. We believe that the BoJ has the means and credibility to prevent this, but the potential for a policy mistake is one of the biggest risks to financial markets right now.  

US equity markets are at record highs and so are valuations at first sight. The S&P 500 is trading at elevated price-to-earnings multiples (PE) not seen in years. On the surface, valuations appear lofty, fuelling the debate about a potential bubble. Yet, strong earnings growth expectations over the long run provide crucial context: Earnings are projected to rise around +15% annually in the US, well above Europe’s +10%, bringing price-to-earnings-to-growth ratios (PEG) to historically reasonable levels. But the US rally is concentrated among a handful of mega-cap technology firms, which are driving both revenue growth and an unprecedented AI-driven investment boom – 18 times the average S&P 500 firm. This suggests a boom underpinned by fundamentals rather than a bubble, albeit one that is fragile and critically dependent on the durability of the AI trade and a few companies involved.