EXECUTIVE TAKEAWAYS
This week, legal frameworks and geopolitical threats overrode economics. Trump replaced struck-down IEEPA tariffs with Section 122 duties citing a balance-of-payments crisis economists say doesn’t exist—his own Justice Department previously called the statute irrelevant for trade deficits. Japan nervously sought assurances its $550 billion deal won’t be undermined by “stacked” tariffs, refusing to renegotiate for fear of worse. Markets reopened to chaos as China slapped export controls on Japanese firms and the yen weakened despite intervention speculation. Saudi Arabia’s deficit widened to $25.28 billion as Vision 2030 spending outpaces oil gains, while South Korea and Brazil locked in minerals partnership bypassing traditional frameworks. The Bank of Israel held rates despite 1.8% inflation, prioritizing Iran threats over domestic conditions.
The pattern: Policy is no longer about economics; it’s about power, threats, and tribute payments disguised as trade deals.
THE RUNDOWN
1. GLOBAL MARKETS AND MOMENTUM
Yen weakens as Asian markets reopen to renewed tariff turmoil
The yen dipped 0.3% to 155.05 as markets reopened to Trump’s tariff chaos after the Supreme Court struck down IEEPA tariffs. Trump invoked Section 122 for temporary 15% duties and warned countries against retreating from trade deals. China announced export controls on 20 Japanese entities citing “remilitarisation,” while the Nikkei reported U.S. authorities conducted rate checks last month without Tokyo’s request. The dollar index rose 0.12% to 97.81 as the State Department pulled non-essential personnel from Beirut.
Strategic Impact: The yen’s weakness despite intervention speculation reveals Tokyo’s higher tolerance for depreciation, especially as Takaichi reiterates “pluses and minuses” of yen weakness. China’s export controls on Japanese firms signal willingness to escalate beyond trade into strategic supply chains, a precedent that could fragment Asian manufacturing networks built over decades.
2. CENTRAL BANK POLICY
Bank of Israel holds rates at 4% as Iran confrontation fears override inflation easing
The Bank of Israel kept rates steady at 4% after two consecutive cuts, citing “geopolitical uncertainty” from potential U.S.-Iran confrontation that “overshadowed” January’s 1.8% inflation, a 4.5-year low within the 1-3% target. Manufacturers’ Association criticized the decision given the shekel’s 15% nine-month appreciation, warning it intensifies export pressure and damages competitiveness.
Strategic Impact: Israel’s central bank revealed the new policy hierarchy: geopolitics trumps everything. Inflation at target, strong currency hurting exporters, ceasefire reducing supply constraints, all irrelevant when Iran tensions spike. This creates a precedent where monetary policy becomes hostage to external security threats, meaning rates stay higher regardless of domestic conditions.
3. SOVEREIGN FINANCE
Saudi Arabia’s deficit widens to $25.28 billion in Q4 as Vision 2030 spending climbs
Saudi Arabia’s budget deficit expanded to $25.28 billion in Q4 from Q3’s $23.6 billion, as spending jumped to 371 billion riyals while oil revenue rose marginally. The full-year deficit reached 276 billion riyals, exceeding the revised 245 billion estimate, as the Kingdom maintains expansionary fiscal policy for Vision 2030 diversification. Total debt climbed to 1.52 trillion riyals from 1.22 trillion a year earlier as Riyadh borrows to plug the gap.
Strategic Impact: JSaudi Arabia is discovering Vision 2030’s diversification costs more than oil windfalls can cover, even with production increases. The 240 billion riyal debt surge signals a race against time, either non-oil revenue accelerates dramatically or the sovereign balance sheet deteriorates until borrowing costs spike. The fiscal math works only if mega-projects like NEOM generate returns before debt service becomes unsustainable, but early signs suggest spending outpaces revenue transformation.
4. INVESTMENT POWER AND CAPITAL FLOWS
South Korea and Brazil forge strategic partnership targeting critical minerals and green investment
South Korean President Lee and Brazilian President Lula elevated bilateral ties to strategic partnership, signing 10 MOUs spanning critical minerals, AI, green industries, and the Amazon Fund. Brazil, holding the world’s second-largest rare-earth reserves and substantial nickel deposits, courted South Korean investment as both agreed to resume stalled Mercosur-South Korea trade talks suspended since 2018. The summit comes as global trade faces uncertainty from U.S. tariff confusion.
Strategic Impact: The timing matters: as Trump’s tariff chaos destabilizes traditional routes, countries lock in bilateral resource deals bypassing multilateral frameworks. For South Korea, this is insurance against Chinese export restrictions and U.S. unreliability. For Brazil, strategic minerals are the new oil—whoever controls them writes energy transition rules. If these bilateral pacts proliferate, they’ll fragment global supply chains along ideological lines, making “friendshoring” the new normal.
5. TRADE AND ECONOMIC DIPLOMACY
Trump’s Section 122 tariffs invoke balance-of-payments crisis economists say doesn’t exist
Trump replaced struck-down IEEPA tariffs with 15% duties under Section 122, citing a “large and serious” balance-of-payments crisis based on a $1.2 trillion goods trade deficit. Former IMF First Deputy Gita Gopinath flatly rejected the claim, stating “the U.S. is not facing a balance of payments crisis,” noting stable borrowing costs and market access.
Strategic Impact: Trump’s invocation of a non-existent crisis exposes the legal gymnastics underpinning his trade war, when one statute fails, find another. The irony: his Justice Department already admitted Section 122 doesn’t apply to trade deficits, handing challengers a litigation roadmap. Redefining the “balance-of-payments crisis” to include any trade deficit rewrites international norms and gives every country justification for retaliatory protectionism.
Japan seeks equal treatment under trade deal as Trump’s new tariffs threaten stacking
Japan requested the U.S. ensure its treatment under Trump’s new 15% tariff regime matches last year’s deal, with Trade Minister Akazawa warning some exports could face higher levies if new duties “stack” upon existing ones. The U.S. and Japan reaffirmed their July deal—15% auto tariffs for $550 billion in U.S.-bound loans and investment, with Tokyo unveiling $36 billion in initial projects.
Strategic Impact: Japan’s caution reveals the extortion dynamics—Tokyo is financing $550 billion not as investment but as protection money to avoid worse tariff outcomes. The fear of “stacking” exposes how Trump’s legal maneuvering creates uncertainty where existing deals become meaningless if he adds new levies on top. Japan’s refusal to renegotiate despite potential losses shows how thoroughly Trump has intimidated allies: even when wronged, they’re too afraid to push back.
WATCH THIS SPACE
Three fractures widening beneath market calm. Trump’s Section 122 tariffs are legally vulnerable, his Justice Department already said this statute doesn’t apply, creating an obvious litigation path. If courts strike this down, the tariff regime collapses into executive overreach with no statutory cover. Japan’s tribute system is unsustainable, financing $550 billion to avoid worse tariffs while still facing potential “stacking” means compliance never ends and demands only escalate. Central banks are abandoning economic frameworks for geopolitical calculus—Israel prioritizing Iran threats over inflation, Japan tolerating yen weakness for fiscal flexibility. When monetary policy becomes hostage to security concerns, traditional signaling breaks down. Markets price these as temporary disruptions. They’re structural breaks that metastasize.
This briefing is based on information from Reuters.