The first wave of Trump’s tariff letters just dropped, and they hit two of America’s closest Asian allies: Japan and South Korea. These aren’t fresh targets. Both countries are already dealing with hefty duties on auto and steel exports. Now, Trump’s trade team just turned up the heat.
At a time when both economies are flirting with recession, this escalation couldn’t have come at a worse moment. Japan’s GDP is already in contraction territory, and South Korea’s growth outlook was recently slashed. The fear? That more tariffs could tilt these export-driven giants further into economic slowdown.
Here’s what you need to know and why it matters.
1. Trump Hits the Gas on Tariffs
US to impose 25% tariffs on Japan & South Korea from Aug 1. 12 more nations warned, with duties up to 40% on others like Malaysia & South Africa. Trump ramps up global trade war.
Watch 📹
youtube.com/watch?v=N1giER…— #Mint (#@livemint)
9:03 AM • Jul 8, 2025
South Korea will keep facing a 25% tariff on exports to the U.S., while Japan just got bumped up by 1% to match. It may sound minor, but for economies built on auto, steel, and electronics exports, even small changes pack a punch. Japan’s top export to the U.S. is cars. South Korea sends a ton of steel. These aren’t soft spots, they’re the backbone of trade.
2. Recession Risk Is Real
Japan’s economy shrank last quarter. So did South Korea’s. The World Bank says exports make up 22% of Japan’s GDP and a massive 44% for South Korea. Hit those hard enough, and you don’t just dent growth, you threaten a technical recession. Economists already project Japan’s GDP to shrink by 0.1% through 2026 just from this new round of tariffs.
3. FX Markets Could Get Shaky
If growth stalls and trade pressures mount, central banks might be forced to lean dovish. That means rate cuts or easing talk. For us traders, that spells volatility in USD/JPY and USD/KRW. Safe havens like the Yen might get demand, but only if Japan doesn’t slip too far into contraction. The Dollar, meanwhile, could strengthen if risk aversion returns.
4. Diplomatic Pressure and Policy Poker
That letter is another TACO, pushing back until august 1st. At the end he will have just made everyone wasting their time for predictible results, he'll end up with a free trade deal with Japan. His goal is perhaps to also "force" japan to buy american cars, to which Japan will
— #Mao Tse Trump 🐶 (#@JeanPascalMorin)
7:47 PM • Jul 7, 2025
Japan's PM is still pushing for a deal, but not one that leaves auto tariffs intact. Trump, meanwhile, says he’s open to tweaks if markets open up to U.S. goods. What could this mean? This is a high-stakes game of tariff poker. The frustration from Washington over slow progress, especially with Japan’s principled stance, is boiling over.
5. Markets Are Still Calm (For Now)
Despite the drama, financial markets haven’t panicked yet. HSBC notes that the letters are effectively a deadline extension for more negotiations. If that optimism fades or if talks stall, we should brace for impact. Rate bets, risk sentiment, and capital flows could shift quickly.
Here’s the Takeaway:
The U.S. just reminded Japan and South Korea that tariffs are back on the front burner. With both economies already cooling and domestic demand weak, this could be the push that tilts them into recession. For us traders, it’s not just about trade headlines, it’s about watching FX pairs, central bank reactions, and sentiment swings.
