06:34 AM EST, 11/25/2025 (MT Newswires) -- MUFG said Monday's rebound in U.S. equity markets failed to carry over into Tuesday's Asian session.

The Nikkei 225 opened more than 1% higher after Japan's market holiday on Monday but later surrendered those gains, the bank wrote in a note to clients. MUFG added that the recent softness in Japanese equities partly reflects investor concerns about the escalating geopolitical tensions between China and Japan.

It was reported overnight Monday that Japanese Prime Minister Sanae Takaichi spoke with President Donald Trump by phone at his request, and he briefed her on his phone call with Chinese President Xi Jinping. The phone call between Presidents Trump and Xi reportedly lasted an hour, during which President Xi told President Trump that Taiwan's return to China was "an integral part of the post-war international order."

Market participants are hoping that the talks will help to prevent geopolitical tensions between China and Japan from escalating further and reduce risks to the recent 12-month extension of the U.S.-China trade truce, stated MUFG. It follows China's decision to write a letter to the United Nations accusing Japan of violating international law by suggesting its armed forces could be drawn into a Taiwan conflict.

However, there have been reports overnight Monday that China has asked airlines to extend Japan flight cuts until March 2026. According to Bloomberg, cancellations of Chinese flight bookings to Japan had accelerated, prompting airlines to begin cutting capacity. There had already been reports that state-owned agencies were cancelling tours and warning against visiting Japan.

The hit to tourism continues to pose downside risks to Japan's economy. According to the Japan National Tourism Organization, the number of Chinese tourists to Japan rose by 40.7% year over year to 8.2 million between January and October. Spending from Chinese visitors accounted for around 24% of the total for all international visitors, coming in at 1.6 trillion yen between January and September.

It is another source of economic uncertainty, which could add to the Bank of Japan's caution over resuming rate hikes and has likely contributed to the yen's (JPY) recent weakening trend, pointed out MUFG.

Nevertheless, the Japanese rate market has still moved overnight to price in a higher probability of the BoJ hiking rates at either the December or January policy meetings after re-opening following Monday's holiday in Japan. The Japanese rate market is now pricing in around 9bps of hikes by December and 22bps by January 2026, encouraged by hawkish comments from BoJ officials over the past week, added the bank.

At the same time, Growth Strategy Minister Minoru Kiuchi continued to verbally intervene to support the yen by stating that the Japanese government is watching currency movements, including speculative activity, with a high sense of urgency. For the intervention to be more effective at reversing the yen weakening trend, it will need to be backed up by the BoJ resuming rate hikes as well, according to MUFG.