East Asian Markets Drop Amid Stalled FTA and Escalating Geopolitical Tensions

Both the Japanese and South Korean stock markets experienced significant declines today, with the Nikkei 225 Index dropping by 2.50%. Analysts are pointing to ongoing geopolitical tensions and regional trade dynamics as key factors influencing investor sentiment. The Kospi Index also fell, reflecting broader uncertainty as East Asian nations navigate complex economic and political challenges, according to a Korea Times report.

China's renewed push for a trilateral free-trade agreement (FTA) between China, Japan, and South Korea has reignited discussions about regional economic integration, but progress remains fraught with obstacles. During the Asia-Pacific Economic Cooperation (APEC) forum, Chinese Commerce Minister Wang Wentao emphasized the need to resume stalled FTA negotiations, which were first launched in 2012 but have languished in recent years. However, experts caution that Japan's new right-leaning government under Prime Minister Sanae Takaichi, aligned with U.S. President Donald Trump, may resist deeper ties with China. Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis, noted that Takaichi's pro-U.S. stance could limit the FTA's scope, with potential gains for South Korea and Japan likely outweighed by China's growing self-sufficiency in key sectors, the Korea Times reported.

South Korea, meanwhile, has signaled optimism about its economic recovery. President Lee Jae Myung declared that the country has "turned a corner" in his annual budget speech, citing a 1.2% third-quarter GDP growth rate and improved consumer sentiment. Lee outlined an 8.1% increase in 2026 government spending to 728 trillion won ($512 billion), with a focus on AI, semiconductors, and cultural industries. The government's $20 billion emergency budget, including direct cash handouts, has bolstered domestic demand, though challenges persist in stabilizing export markets amid U.S. tariff threats, according to a Reuters report.

The trilateral FTA faces additional hurdles beyond political dynamics. China, Japan, and South Korea are already part of the Regional Comprehensive Economic Partnership (RCEP), which offers a less ambitious trade framework. Su Yue, principal economist for China at the Economist Intelligence Unit, argued that the room for further integration is limited, with potential progress likely confined to services and digital trade. Meanwhile, Japan's export controls on high-end semiconductor equipment and China's rare earth restrictions continue to strain bilateral relations, complicating broader cooperation, the Korea Times noted.

As markets react to these developments, the interplay between geopolitical tensions and economic policy will remain pivotal. With the U.S. Supreme Court set to deliberate on Trump's tariff authority next week, investors are closely watching how regional alliances and trade strategies evolve in response to Washington's influence, the Korea Times added.