Why Toyota Stock Zoomed Nearly 14% Higher on Wednesday

Key Points

• The Trump administration reached a deal on trade with Japan.

• The two sides negotiated tariffs on auto imports to 15%, far lower than their previous level.

• 10 stocks we like better than Toyota Motor ›

Investors in Japanese stocks breathed a collective sigh of relief on Wednesday, following a deal the country struck with the U.S. to pay lower tariffs on imports.

With the powerful Japanese car industry being a particular focus of the deal, Toyota Motor (NYSE: TM) was a major beneficiary of that sentiment. The storied automaker's stock popped by nearly 14% over the course of that day, easily beating the 0.8% bump of the S&P 500 index.

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It was all about the tariffs

Late Tuesday, Japan and the U.S. reached a trade agreement stipulating that tariffs on auto imports from the country would be reduced substantially, to 15% from the preceding 27.5%. The levy on other Japanese goods is also to be cut to 15%; previously the level was 25%.

Image source: Getty Images.

That 27.5% tariff was set in April, near the beginning of the Trump administration's efforts to enact "punitive" levies on key American trading partners. Tuesday's deal includes not only a change in the tariff regime, but also a commitment from Japan to provide a $550 billion package of investments into the U.S., plus loans.

The auto sector is a crucial one for Japan, not least because it alone comprises more than a quarter of the country's exports to the U.S. Its models have been popular with American consumers for decades, and Toyota is a poster child for Japanese success on this market.

Domestic manufacturing/import mix

Toyota has had manufacturing plants in the U.S. for quite some time -- at the moment it operates a total of 11 -- so to a degree it was insulated from punitive tariffs, and will continue to be. Regardless, it needs to import in order to satisfy American demand, and because of this the tariffs have an impact. Investors were right to cheer the news that they had been slashed.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.