TOKYO — As if Japan’s economy weren’t having a rotten enough 2025, Donald Trump just upped the pressure exponentially with a 25% tariff.
The same day Tokyo got disastrous news from Washington, data showed that real wages in Japan fell the fastest in 20 months in May. The 2.9% year-on-year drop marks the fifth consecutive month in which wages fell.
This is bad news on a number of levels. Not least of which is that 2025 was supposed to be the year Japan’s long-coveted virtuous cycle finally arrived to hasten consumer spending and broader economic growth.
In spring 2024, unions scored the biggest wage increase in 33 years — 5.28%. By year-end, though, the increase failed to materialize. Wages ended 2024 essentially flat. Then came US President Trump’s trade war, which is making wage gains even less likely. Might wage cuts now be the question?
The 25% import tax that Trump just slapped on Japan, effective August, will be layered on top of his 25% auto tariff.
“If the high tariffs persist, negative effects on exports and capital investment will be unavoidable,” says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG.
As much as this is a loss for Japan, the return of “Tariff Man” is a win for China. Japan isn’t alone this week. Trump hit close US ally South Korea with a 25% wallop, while his administration shocked Southeast Asia with outsize tariffs. He slapped a 32% tax on Indonesia, 36% on Cambodia, 40% on Laos, 40% on Myanmar.
Trump risks single-handedly assembling a China-Japan-Korea-Southwest Asia bloc, something that Xi Jinping’s inner circle could never have done on its own.
Certainly, Trump just gave Japanese Prime Minister Shigeru Ishiba and new Korean President Lee Jae Myung a fresh reason to join forces. And to take seriously signals from Beijing that a three-way free-trade deal could be in the cards.
An immediate loser is the Bank of Japan, which spent the last year working to normalizing interest rates.
“With wage growth stumbling and inflation proving sticky, the BoJ’s job will get much harder,” says Stefan Angrick, senior economist at Moody’s Analytics. Also, Angrick says, “this casts a long shadow over the upper house election on 20 July,” when Ishiba’s Liberal Democratic Party had hoped to win back an outright majority in parliament.
Ishiba could always try to rush a US trade deal into existence before August, but likely at great cost for Japan’s commercial interests. But as Ishiba said this week about Trump’s threats, “we will not easily compromise. That’s why it is taking time and why it is tough” to do a deal.
Angrick adds that the “fact that pay growth is slowing is hardly surprising, given the flurry of shocks hitting the Japanese economy since the start of the year. US tariffs and tariff threats have damaged Japanese manufacturing, created uncertainty, and delayed investment in capital and in workers.”
But, Angrick adds, “it’s sobering that underlying wage growth hasn’t proven more resilient, even after shunto wage negotiations from 2023 to 2025 produced multi-decade record results. With US-Japan trade talks stuck … the economic outlook is incredibly challenging.” For BOJ Governor Kazuo Ueda, “justifying” additional “rate hikes will get tougher if pay keeps sliding,” Angrick concludes.
At the same time, prospects for lower US interest rates are dwindling. Considering higher oil prices, ever-rising tariffs and immigration restrictions in the US, “the bottom line is that we should see inflation move higher over the coming months,” notes Torsten Slok, chief economist at Apollo Global Management.
It’s but one example of how Trump risks sabotaging his own economy. At the moment, Scott Wren, global market strategist at Wells Fargo Investment Institute, thinks Wall Street consensus is “overly optimistic on the tariff outlook.”
Wren worries the feedback effects from tariffs will slam US growth. “Our feeling is that stocks are ahead of themselves and, as a result, we are looking to trim positions in markets and sectors we find to be overvalued,” Wren explains.
Others think the US economy won’t necessarily be derailed by global headwinds.
“Our base case remains that the uncertainty around tariffs won’t be enough on its own to bring the US economy to a crashing halt,” write analysts with Capital Economics. “If so, it’s unlikely to be enough to dampen investors’ enthusiasm for US equities.”
The wild card is how tariffs affect the outlook for consumer prices. the Capital Economics analysts say. “It’s been clear in recent weeks that many [Federal Reserve officials] are not confident about cutting rates until the inflationary effects of tariffs are clearer, and we doubt they’ll cut this year.”
Kai Wang, a strategist at Morningstar, thinks Asia will take tariff fallout in stride. “Asian markets are treating the latest tariff move more as posturing than policy, with room still seen for dialogue,” he says.
Yet throwing Japan under the proverbial bus raises tantalizing questions, including how Tokyo leverages the US$1.1 trillion worth of US Treasuries it owns. As Morgan Stanley’s Yamaguchi asks: “Will Japan use US Treasury holdings as a bargaining chip?”
Yamaguchi’s take is that it’s unlikely under the current Ishiba administration. Yet in May, Finance Minister Katsunobu Kato raised eyebrows around the globe by stating that “everything that could be a bargaining chip should be on the table” regarding Japan’s US Treasuries holdings. Though Kato later tried to walk back that statement, it remains a live question in market circles.
This isn’t the first time bond traders worried Tokyo might dump large blocks of Treasuries. In 1997, for example, then-Japanese Prime Minister Ryutaro Hashimoto told a New York audience that “several times in the past, we have been tempted to sell large lots of US Treasuries” to make a point. One such episode was the heated auto negotiations a few years earlier.
This time, the intrigue involves the Trumpian turmoil already on full display. Back in April and May, the so-called “bond vigilantes” literally screamed at the Trump administration over its tariffs. These activist traders sent US Treasury yields skyrocketing amid fears of the inflationary impact of Trump’s trade war and the fiscal implications.
At the time, the turmoil quickly ended up on Japanese shores, with government bond yields spiking in headline-grabbing ways. The volatility culminated in mid-May with a failed 20-year bond auction. The typically routine sale of US$6.9 billion issues maturing in 2045 drew the least interest since 2012. The “tail” – the gap between the average and lowest-accepted prices – was the worst since 1987.
Suddenly, #JGBCrash was trending in Asian cyberspace. It was Tokyo returning the favor, sending shockwaves back toward the US. In late May, US Treasury Secretary Scott Bessent expressed concern that turmoil in Japan was pushing US yields higher, the way Treasury market turmoil unnerved Japan earlier in the month.
That same month, Ishiba hardly helped things by saying that Japan’s deteriorating finances were “worse than Greece.” It put Japan in global headlines for all the wrong reasons at the worst possible moment.
Ishiba was making a more nuanced point than that. His argument was aimed at lawmakers planning to cut taxes. Ishiba framed it as a luxury Japan couldn’t afford, given its lack of fiscal space. Yet his gaffe went viral in market circles — in the worst possible ways. No doubt it drew the attention of credit-rating companies everywhere.
In late May, Tokyo held a less-than-stellar 40-year bond sale. The good news, notes strategist Masahiko Loo at State Street Global Advisors, is that
We believe the concern on loss of control over the super-long end is overblown. Around 90% of JGBs are domestically held, and the “don’t fight the BOJ/Ministry of Finance” mantra remains a powerful anchor. Any perceived supply-demand imbalance is more a matter of timing mismatches, which is a technical dislocation rather than a fundamental flaw. We expect these imbalances to be resolved as early as the third quarter.
But Trump’s shortsighted targeting of vital allies Japan and Korea plays into the hands of Xi’s Communist Party.
In Tianjin late last month, Premier Li Qiang projected confidence that China is morphing the nation “into a mega-sized consumer powerhouse on top of its solid foundation as a manufacturing power.” Li said “this will bring vast markets to enterprises from all countries” with China positioned to “to cross cycles, move forward steadily, and continue to inject more stability and certainty into the world economy.”
When Li called for “all parties to avoid the politicization of economic and trade issues” and framed China’s Asia vision as a win-win for the region, he couldn’t have known that Beijing would get a big assist from Trump this week.
