Trump's 35% tariff threat feeds Japan's worst-case scenario fear
Japan should be forced to "pay 30%, 35% or whatever the number is that we determine, because we also have a very big trade deficit with Japan,' Trump said, again flagging the possibility that across-the-board tariffs could go much higher than the 24% initially penciled in for July 9. "I'm not sure we're going to make a deal. I doubt it with Japan, they're very tough. You have to understand, they're very spoiled.'
Market participants and analysts warned against taking Trump's comments at face value and suggested that some kind of deal will eventually get done. But they also warned that Prime Minister Shigeru Ishiba's government may need to change tack from a friendly and firm stance that is now leading the two sides to brinkmanship.
"There is some risk of a US tantrum that results in higher punitive actions by Washington this month,' said Kurt Tong, a former senior US diplomat in Asia who's now a managing partner at the Asia Group. "If that happens, Japan may have no choice but to hit back with its own specific countermeasures.'
Trump's latest threat fits in with a high-pressure deal-making strategy that sometimes results in big last-minute concessions on both sides, as seen with China, but market players still need to game out how to position themselves should talks founder.
While few analysts see Japan's stocks collapsing on a no-deal scenario, some of them forecast the Nikkei 225 to fall into the 38,000 range, a decline of more than 4%, rather than rallying above 40,000 if there's an agreement.
The Nikkei 225 edged down 0.6% to close at 39,762 on Wednesday while the yen was trading at 143.88 against the dollar, down around 0.3%.
Japan has so far stood firm in negotiations over across-the-board reciprocal tariffs, insisting that they be removed along with additional sectoral tariffs on autos, steel and aluminum. The car duties are particularly painful for Japan as the industry contributes the equivalent of almost 10% of gross domestic product and employs around 8% of the workforce.
Tokyo has insisted that a "win-win' deal must encompass all the tariffs in one go with Ishiba preferring no deal to a bad deal ahead of a July 20 upper house election. The prime minister on Wednesday reiterated his view that focusing on jobs and investment in the US was the way forward, just like it was for Nippon Steel as it patiently sought to change Trump's view and take over US Steel.
"Japan is the biggest global investor in the US and the world's biggest contributor to US jobs,' Ishiba said in Tokyo on Wednesday. "That means Japan is different from other countries.'
But as July 9 gets closer, some observers say more needs to be done to convince the US to back off.
"We have to work on Trump himself, to first try to avoid the tariffs to be imposed from July 9,' said Ichiro Fujisaki, former Japanese ambassador to the US, adding that the president's remarks show that Tokyo hasn't brought enough to the table yet.
"We don't have something like rare earths but the US is dependent on Japanese industry as well. About half of materials for making semiconductors come from Japanese industry,' Fujisaki said, pointing to a possible area of leverage, too.
In the meantime, market players are evaluating the potential scale of the fallout.
"There is a lot more risk of things falling apart than is being priced in by the market,' said Zuhair Khan, a fund manager at UBP Investments. "There is always the risk of a policy blunder by either side.'
He points to the 32,000 Nikkei level on the day Trump first announced the reciprocal tariffs. "If the probability of a no deal is 25% then the Nikkei should be at 38,000.'
What Bloomberg Economics Says...
"If Japan is ultimately forced to pay reciprocal tariffs at those rates, on top of the 24% rate announced on 'Liberation Day' - currently suspended at 10% - the macroeconomic fallout would be sizable. Our estimate through a model of global trade suggests a medium-term GDP hit of around 1.2%, roughly double the 0.6% drag expected under the current levy.'
- Taro Kimura, economist
For the full report, click here.
The point of imposing a deadline in negotiations is to create an opportunity for leverage, so it's not surprising to see Trump pushing high tariffs as a threat to push for better deals as the date approaches, said Phillip Wool, head of portfolio management at Rayliant Global Advisors Ltd.
"There's also an element of political theater here, as Trump's narrative to American voters is that the US has been bullied on trade for so long, and there's clearly a desire to look 'tough' on trade,' Wool said. "But there has to be a face-saving deal at some point so that it looks like the negotiation was truly a success as opposed to the mutually assured destruction of impasse and perpetually high tariffs.'
Like some other market players, Wool is wary of an overly pessimistic knee-jerk response to each remark Trump makes. If there is a big selloff in a worst-case scenario, Wool sees it as a great buying opportunity for long-term, active investors.
Strategists are split on how a bad scenario might play out for the yen. While some such as SBI Liquidity Market Co.'s Marito Ueda see the possibility of risk aversion sparking a strengthening of Japan's currency to the 138 range against the dollar, others see a weakening as more likely.
A stalemate in trade talks would likely delay the Bank of Japan's next interest rate hike, especially if it led to tariffs of up to 35% in the meantime, said Akira Moroga, chief market strategist at Aozora Bank. Movement would slow after the 145 mark, making a push past 147 difficult, he said.
Still, the consensus is that a deal will be reached sooner or later, and that Japan will have to concede more ground to achieve it.
"If it's concluded I don't think it's going to be a win-win situation,' said Fujisaki. "Maybe a capital-letter 'WIN' for US, but a small letter 'win' for Japan.'
--With assistance from Momoka Yokoyama, Toshiro Hasegawa, Umesh Desai, Hidenori Yamanaka, Mari Kiyohara, Aya Wagatsuma and Akemi Terukina. - Bloomberg
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
New Straits Times
2 hours ago
- New Straits Times
Trump's tariff deadline to have only 3 outcomes
A few days before United States President Donald Trump reimposes steep tariffs on dozens of economies, including the European Union and Japan, many are still scrambling to reach a deal that would protect them from the worst. The tariffs taking effect on July 9 are part of a package Trump imposed in April citing a lack of "reciprocity " in trading ties. He slapped a 10 per cent levy on most partners, with higher customised rates to kick in later in countries the US has major trade deficits with. But these were halted until this month to allow room for negotiations. Analysts expect countries will encounter one of three outcomes: they could reach a framework for an agreement; receive an extended pause on higher tariffs; or see levies surge. "There will be a group of deals that we will land before July 9," said Treasury Secretary Scott Bessent last Friday on CNBC. Policymakers have not named countries in this group, although Bessent maintains that Washington has been focused on striking deals with about 18 key partners. "Vietnam, India and Taiwan remain promising candidates for a deal," said Asia Society Policy Institute vice-president Wendy Cutler. Without a deal, Vietnam's "reciprocal tariff" rises from the baseline of 10 per cent to 46 per cent, India's to 26 per cent and Taiwan's to 32 per cent. Josh Lipsky, international economics chair at the Atlantic Council, cited Indian negotiators' extension of their US trip recently in noting that it "seems like a frontrunner ". "Japan was in that category, but things have set back a little," said Lipsky, referring to Trump's criticism on Monday over what the president called Japan's reluctance to accept US rice exports. The deals, however, would unlikely be full-fledged trade pacts, said analysts, citing complexities in negotiating such agreements. Since April, Washington has only announced a pact with Britain and a deal to temporarily lower tit-for-tat duties with China. Bessent has also said countries "negotiating in good faith" can have their tariffs remain at the 10 per cent baseline. But extensions of the pause on higher rates would depend on Trump, he added. "With a new government, (South) Korea looks well positioned to secure an extension," said Cutler of ASPI. Lipsky expects many countries to fall into this bucket, receiving an extended halt on higher tariffs that could last until Labour Day, which falls on Sept 1. Bessent earlier said Washington could wrap up its agenda for trade deals by Labour Day, a signal that more agreements could be concluded but with talks likely to extend past July. For countries that the US finds "recalcitrant", however, tariffs could spring back to the higher levels Trump previously announced, Bessent has warned. These range from 11 per cent to 50 per cent. Cutler warned that "Japan's refusal to open its rice market, coupled with the US resistance to lowering automotive tariffs, may lead to the reimposition of Japan's 24 per cent reciprocal tariff ". Trump himself said on Tuesday a trade deal was unlikely with Japan and the country could pay a tariff of "30 per cent, 35 per cent, or whatever the number is that we determine". Lipsky believes that the EU is at risk of having tariffs snap back to steeper levels, too —to the 20 per cent unveiled in April or the 50 per cent Trump more recently threatened. An area of tension could be Europe's approach to digital regulation. Trump recently said he would terminate trade talks with Canada — which is not impacted by the July 9 deadline — in retaliation for the country's digital services tax, which Ottawa eventually said it would rescind. This week, EU trade chief Maros Sefcovic is in Washington in a push to seal a trade deal, with the EU commission having received early drafts of proposals that officials are working on.
Malaysia Sun
3 hours ago
- Malaysia Sun
Ukraine looking to EU to bypass US weapons freeze Politico
Several bloc members are reportedly weighing options to buy American weapons to be handed over to Kiev Ukraine wants its EU backers to purchase American-made weapons on its behalf in order to offset the suspension of key US arms deliveries to Kiev, Politico reported on Wednesday. US media outlets reported earlier this week that supplies of Patriot missile interceptors - touted as important in repelling Russian strikes - as well as GMLRS rockets, Hellfire missiles, and thousands of 155mm artillery shells have been put on hold. NBC noted that some US cargo had already reached Europe but was being withheld from transfer to Ukrainian forces. US officials later confirmed the development, portraying it as part of the "America first" policy and stating that the country must maintain its weapons stockpiles to ensure "our own success on the battlefield." The freeze "blindsided top Ukrainian officials" and has prompted Kiev to ask Washington "to let Europe purchase US weapons for Ukraine," several Politico sources claimed. "We don't have a choice," an unnamed Ukrainian official added. Several European countries are reportedly reviewing potential purchases. However, the weapons transfers would still require US approval, one person told Politico, indicating that Ukraine's attempts to keep weapons flowing could become mired in additional negotiations. Part of the push involves overcoming export restrictions that Washington typically imposes on foreign use of its arms. Under the administration of former US President Joe Biden, even British deliveries of Storm Shadow missiles to Ukraine were initially delayed because the systems contained American components, Politico noted. A Ukrainian official told the outlet that similar hurdles could be addressed during the talks, although it remains unclear whether the US would sign off on deliveries. The administration of US President Donald Trump appears to be warming up to the idea of direct military sales to Kiev, according to the magazine. Politico in particular cited a recent meeting between Trump and Ukrainian leader Vladimir Zelensky on the sidelines of the NATO summit in the Netherlands, with one person briefed on the talks claiming that Trump seemed "compassionate" and "understanding," although no specific commitments were detailed. The US weapons freeze has caused frustration in Kiev, with Ukrainian MP Mariana Bezuglaya proclaiming that the country "is no longer our ally." The Ukrainian Foreign Ministry also summoned US charge d'affaires John Ginkel to underscore "the critical importance" of deliveries and warn against any "delay or procrastination." Russia has consistently denounced Western arms deliveries to Ukraine, insisting they will only drag out the conflict without changing its eventual outcome. (
Free Malaysia Today
3 hours ago
- Free Malaysia Today
Trump tax bill stalled by Republican rebellion in Congress
US President Donald Trump pressured House Republicans to get the bill over the line in a private White House meeting with several holdouts yesterday. (AP pic) WASHINGTON : Donald Trump's signature tax and spending bill was in limbo early today as Republican leaders in the US Congress scrambled to win over a group of rebels threatening to torpedo the centerpiece of the president's domestic agenda. Trump is seeking final approval in the House of Representatives for his Senate-passed 'One Big Beautiful Bill' – but faces opposition on all sides of his fractious party over provisions set to balloon the national debt while launching a historic assault on the social safety net. As midnight (4am) struck, house speaker Mike Johnson was still holding open a key procedural vote – the bill's last hurdle before it can advance to be considered for final approval – more than two hours after it was first called. With no clear sign of the stalemate breaking, his lieutenants huddled in tense meetings behind the scenes with the rebels who had either voted no or had yet to come to the house floor. 'We're going to get there tonight. We're working on it and very, very positive about our progress,' Johnson told reporters at the Capitol, according to Politico. Originally approved by the house in May, Trump's sprawling legislation squeezed through the Senate on Tuesday by a solitary vote but had to return to the lower chamber yesterday for a rubber stamp of the Senate's revisions. The package honors many of Trump's campaign promises, boosting military spending, funding a mass migrant deportation drive and committing US$4.5 trillion to extend his first-term tax relief. However, it is expected to pile an extra US$3.4 trillion over a decade onto the country's fast-growing deficits, while forcing through the largest cuts to the Medicaid health insurance program since its 1960s launch. While moderates in the house are anxious that the cuts will damage their prospects of reelection, fiscal hawks are chafing over savings that they say fall short of what they were promised by hundreds of billions of dollars. Johnson has to negotiate incredibly tight margins, and can likely only lose three lawmakers among more than two dozen who have declared themselves open to rejecting Trump's bill. 'Abomination' Republican leaders had been hoping to spend just a few hours yesterday afternoon green-lighting the package, although they have a cushion of two days before Trump's self-imposed July 4 deadline. The 887-page text only passed in the Senate after a flurry of tweaks that pulled the house-passed text further to the right. Republicans lost one conservative who was angry about adding to the country's US$37 trillion debt burden and two moderates worried about almost US$1 trillion in health care cuts. Some estimates put the total number of recipients set to lose their health insurance at 17 million, while scores of rural hospitals are expected to close. Legislation in the house has to go through multiple 'test' votes before it can come up for final approval, and a majority must wave it through at each of these stages. There were warning signs early in the day as the package stumbled at one of the first steps, with a straightforward vote that ought to have taken minutes remaining open for seven hours and 31 minutes -making it the longest House vote in history. Johnson had made clear that he was banking on Trump leaning on waverers, as he has in the past to turn around contentious house votes that were headed for failure. The president has spent weeks cajoling Republicans torn between angering welfare recipients at home and incurring his wrath. Trump pressured House Republicans to get the bill over the line in a private White House meeting with several holdouts yesterday. 'What are the Republicans waiting for?,' he posted on his Truth Social platform just after midnight. 'What are you trying to prove??? MAGA IS NOT HAPPY, AND IT'S COSTING YOU VOTES!!!' House Democrats have signaled that they plan to campaign on the bill to flip the chamber in the 2026 midterm elections, pointing to analyses showing that it represents a historic redistribution of wealth from the poorest Americans to the richest. 'Shame on Senate Republicans for passing this disgusting abomination,' house minority leader Hakeem Jeffries told reporters.
