US tariffs dampen investor sentiment and growth prospects

Investor sentiment worsened after US President Donald Trump announced that the United States would implement "reciprocal tariffs" on imports from multiple countries, sparking concerns over a potential economic downturn for not only the US but other economies too.

Government leaders of Japan, the Republic of Korea and Australia have called for responsive measures while analysts noticed negative signals in the markets.

Japanese stocks plunged on Thursday as Trump pressed ahead with higher-than-expected tariffs. The benchmark Nikkei 225 briefly tumbled over 1,600 yen ($10.9) from the previous day, hitting 34,100 yen — the lowest level since early August — during trading hours on the Tokyo Stock Exchange. By the close, the Nikkei 225 had settled at 34,735.93 yen, marking a 2.8 percent decline.

The latest round of tariffs weakened the US dollar and triggered a flight to safety into the Japanese yen. In the foreign exchange market, investors sold off dollar in favor of yen, briefly strengthening the Japanese currency to the upper 147 range.

On Wednesday, Trump announced that the US would implement a 10 percent baseline tariff across the board, with additional tariffs imposed on nearly 60 countries and regions at differing rates. Trading partners like Japan, South Korea and India will face tariffs of 24 percent, 26 percent, and 27 percent respectively.

Japanese Prime Minister Shigeru Ishiba met with key officials on Thursday to assess the economic impact of the reciprocal tariffs and formulate Japan's response. He directed relevant cabinet ministers to conduct a thorough evaluation and implement comprehensive measures, including financial support, to mitigate adverse effects.

Hidetoshi Tashiro, chief economist with the Japanese consultancy Infinity LLC, stressed that the additional tariffs on Japanese imports appear arbitrary, with no clear justification.

"The Trump administration expects that foreign companies will increase direct investment in the US to overcome tariff barriers, leading to a revival of American manufacturing and jobs. However, the arbitrary imposition of tariffs raises concerns that similar arbitrary regulations could be applied to foreign companies operating within the US. As a result, many foreign firms are hesitant to make direct investments in the country," said Tashiro.

Under such extreme uncertainty, businesses in the US and other countries are likely to scale back new investments, while consumers are expected to cut spending. This is expected to lead to an economic slowdown not only in the US but globally. Moreover, in the US, tariffs will drive up prices, increasing the risk of stagflation, he said.

"In the coming years, Japan and China must protect East Asia from the tsunami of Trump tariffs by strongly adhering to and rapidly developing a free trade area that includes South Korea and Southeast Asia," Tashiro said.

On Thursday, South Korea's acting President Han Duck-soo ordered an "all-out" response to the US reciprocal tariffs on imports from the country.

In an emergency meeting of the economic and security strategy task force, Han said the situation is very serious as a global tariff war is approaching, according to a news release issued by South Korea's Ministry of Trade, Industry and Energy.

Han urged the ministry to thoroughly analyze the details and impact of the reciprocal tariffs and to actively engage in negotiations with the US to minimize the impact.

Moon Jong-chol, a research fellow at the Korea Institute for Industrial Economics and Trade, warned that the latest US tariff measures could trigger a global recession, with South Korea, along with the US and other economies, feeling the impact for the foreseeable future.

With the higher-than-expected reciprocal tariffs, South Korea faces greater trade challenges with the US than ever before, given that the US is one of its largest export markets, Moon said.

Although semiconductors were not included in the list of goods subject to reciprocal tariffs, he noted that they are still targeted under separate item-specific tariffs. This, he argued, will disproportionately affect South Korea as compared to countries that do not specialize in semiconductor exports.

Furthermore, many major South Korean electronics manufacturers have already established production facilities in China and Southeast Asia for exports to the US. Moon said the reciprocal tariffs on those regions will severely affect South Korean companies operating there, potentially forcing them to consider relocating production.

Australia has been hit with the Trump administration's flat 10 percent global tariff but has avoided the steeper "reciprocal tariffs" the US imposed on many of its major trading partners.

Prime Minister Anthony Albanese said the tariffs have "no basis in logic" and condemned the step as "not the act of a friend." The country's central bank also cautioned that US trade policies pose serious economic risks, disrupting markets and driving up costs for businesses.

"In the face of US tariffs, Australia has an uncomfortable choice: act with the courage of its convictions around the rule-based order or act with cowardice, kowtowing to the US," said Daryl Guppy, an international financial technical analysis expert who previously served on the national board of the Australia China Business Council.

Guppy stressed that Australia should coordinate a regional response to uphold the rules-based order and swiftly align itself with international institutions that support free trade.

"Australia needs to show full support for ASEAN, APEC, the RCEP trade and other regional agreements," he said. "It means working with China to endorse and support these global structures and the idea of multipolarity."

Alexis Hooi in Sydney contributed to this story.