Japan and South Korea Hit with New Tariffs — Will Asia See A Round of Currency Depreciation?

TradingKey - Ahead of the July 9 expiration of reciprocal tariff suspensions, U.S. President Donald Trump announced new tariffs on Japan and South Korea at 25%, reigniting concerns over trade tensions. Foreign exchange strategists warn that the yen, won, baht, and other Asian currencies may face near-term depreciation pressure. However, Trump's extension of the implementation deadline to August 1 signals flexibility in his negotiation strategy, leaving the medium-term outlook for Asian currencies uncertain.

On Monday, July 7, Trump posted on Truth Social that he had sent tariff letters to leaders of 14 countries. Starting August 1, Japan and South Korea will face a 25% tariff, while the other 12 nations will be subject to tariffs ranging from 25% to as high as 40%.

Wells Fargo strategists noted that foreign exchange markets could react more sensitively to the news, with Asian exporters particularly vulnerable. Among G10 currencies, the yen has seen the most crowded long positions, and shifts in won positioning have also been significant.

The yen weakened slightly following the tariff announcement, with USD/JPY rising nearly 0.30% before pulling back to 146.19, up 0.10%. Meanwhile, other Asian currencies like the Chinese yuan and Korean won did not depreciate as expected — USD/KRW fell 0.48%, and USD/CNH declined 0.09%.

Since April, especially after early May, many Asian currencies have strengthened significantly. Analysts attribute this to the perceived end of "American exceptionalism" and the so-called Mar-a-Lago agreement. In 2025, the U.S. dollar has broadly weakened against major Asian currencies, falling most notably against the yen by 7.16%.

USD vs Major Asian Currencies YTD 2025, Source: TradingView

Ahead of the July 9 deadline for the expiration of reciprocal tariff suspensions, Trump’s latest round of trade threats has revived expectations of a potential depreciation wave across Asian currencies.

Analysts at Rayliant Global Advisors predict that Asian equity markets affected by the new trade tensions could decline, and their currencies may weaken — especially Japan.

ANZ Bank noted that a 25% tariff on Japanese goods could pose challenges for the yen. Additionally, due to global policy uncertainty, the Bank of Japan may adopt a more cautious stance toward further rate hikes.

Latest data from the Commodity Futures Trading Commission (CFTC) shows that short USD/JPY positions remain elevated. If further negative tariff news emerges regarding Japan, the pair could face a sharp short squeeze.

However, traders at Sumitomo Mitsui Trust Bank expressed surprise that the yen weakened instead of strengthening in response to the tariff risk. They had expected investors to buy the yen as a safe-haven hedge. With Trump signaling room for negotiation, they believe the yen won’t continue to weaken indefinitely — though there is indeed a risk of accelerated unwinding of yen long positions.

Notably, the new 25% tariff on Japan is almost identical to the 24% tariff announced in early April, while the rate on South Korea remains unchanged. Analysts pointed out that the lack of a significant escalation in tariff levels may help stabilize Asian currencies.

Moreover, the original deadline of July 9 has effectively been extended to August 1. Morgan Stanley analysts remarked that the tariff issue has now returned to the negotiating table — suggesting that the worst-case scenario may still be avoidable.