As the US presidential election approaches, Japan’s markets are closely monitoring the potential impact on the yen and Tokyo stock market.
According to a Bloomberg report, analysts suggest that a Kamala Harris victory could strengthen the yen, while a Donald Trump win might support Japanese stocks but lead to further yen depreciation.
However, the risk of a contested election result leaves Japanese markets bracing for a turbulent period, with heightened volatility likely across key asset classes.
Harris victory seen as support for yen, easing pressure on imports
Should Kamala Harris win, she is expected to maintain continuity in US economic policy, focusing on a gradual reduction in inflation and promoting a stable economic environment.
Such a scenario could lead to the Federal Reserve easing interest rates, a move that may narrow the yield gap between Japan and the US and, consequently, support the yen.
Analysts anticipate that the yen could appreciate under Harris, with Yujiro Goto, head of foreign-exchange strategy at Nomura Securities Co., citing in the Bloomberg report that “the market will react with lower yields and a weaker dollar, and dollar-yen will likely test the 150 level.”
This appreciation would alleviate Japan’s import costs and possibly reduce inflationary pressures on essential goods.
On Tuesday, the yen showed some resilience, reversing a portion of its earlier losses as the dollar-yen exchange rate inched higher by 0.2% to 152.47.
The shift occurred as investors adjusted their expectations around a Republican win.
Japanese stocks, meanwhile, saw a cautious rebound with the broad Topix index rising 0.8% after a prior dip, though the market remains alert to the election’s outcome.
Trump win may drive short-term boost to stocks but deepen yen decline
Conversely, if Donald Trump were to win, his policies favouring tax cuts and deregulation could stimulate the US economy, encouraging dollar demand and favourably impacting Japanese exporters reliant on a robust American market.
In this scenario, the dollar-yen exchange rate could rise further, with Goto suggesting that “if there’s a red sweep, dollar-yen may test a rise above 155.”
Such movement could bring the yen dangerously close to its 38-year low, marked in July, intensifying concerns over Japan’s import costs.
For Japanese stocks, Trump’s return could lead to initial gains, particularly for companies focused on exports.
Masahiko Loo, senior strategist at State Street Global Advisors, notes that “the initial reaction will be a stronger dollar and higher share prices.”
However, Loo cautions that any benefit might be short-lived, especially if Trump revives his stance on imposing tariffs on foreign goods, a move that would likely hurt Japanese manufacturers dependent on American demand.
Tariff threat looms large for Japan’s exports and broader economy
One of the most significant risks of a Trump win would be his potential imposition of new tariffs on major trading partners.
Japan’s economy could take a hit if the US administration levies additional tariffs on Japanese goods.
Trump has floated a policy of placing 10-20% duties on all imports, which would significantly affect Japan’s export-heavy sectors, including automotive, machinery, and electronics.
Such a move would be reminiscent of 2018, when US-China trade tensions escalated under Trump’s tariffs on Chinese goods.
Chisa Kobayashi, a Japan equity strategist at UBS SuMi TRUST Wealth Management, warns that “when Trump imposed tariffs on China in 2018, all Japanese shares came under pressure regardless of their exposure to China.”
If other nations reciprocate with tariffs, Japan’s export market could see sustained losses, slowing economic growth across the board.
Markets prepare for potential election delays and price swings
A final layer of complexity arises from the risk of a delayed or contested US election result.
With Harris and Trump polling closely, the uncertainty could lead to short-term market disruptions.
Analysts expect a period of high volatility as Japanese investors and traders respond to election developments.
Japan’s dollar-yen pair, heavily traded during Asian market hours, could be especially volatile.
According to recent trading data, the one-week implied volatility for the dollar against the yen has risen sharply, reaching levels last seen in August amid heightened speculation over Bank of Japan rate moves.
In such a scenario, Japanese authorities may consider verbal intervention if the dollar-yen rate escalates rapidly, a measure used to calm markets.
Meanwhile, Japanese shares could also see fluctuations influenced by the recent changes in Japan’s domestic political scene, where the ruling coalition’s loss of a majority in the lower house sparked further volatility.
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