Japanese Markets Face Major Shifts as US Election Looms

Key Highlights:

• A Trump win could weaken the yen, boosting Japanese exports but sparking volatility in Japan’s trade relations.
• Harris’s victory may lead to a stronger yen, challenging exporters but stabilizing consumer prices.
• USD/JPY volatility anticipated around election day, with implications for Japan’s bond market and equity performance.

Japanese Assets Brace for US Election: Yen and Stocks Await Critical Outcome

The 2024 U.S. Presidential election looms large over Japanese assets, with potential impacts that range from the yen’s value to stock performance on the Tokyo Exchange. As Kamala Harris and Donald Trump remain neck-and-neck in polls, investors are eyeing both outcomes closely, knowing that each candidate’s policies could drive vastly different trajectories for the yen, Japanese equities, and bond markets.

The Yen’s Predicted Moves: Trump vs. Harris

A Trump victory would likely trigger yen weakness, especially if his administration pursues lower taxes and deregulation, policies that tend to boost the dollar. “If there’s a red sweep, dollar-yen may test a rise above 155, and the focus would be on whether Japanese authorities conduct verbal intervention,” said Yujiro Goto, head of foreign-exchange strategy at Nomura Securities. Analysts from Credit Agricole and Mizuho Bank even foresee the yen slipping toward 160, which would be its lowest level in nearly four decades.

By contrast, a Harris win is expected to stabilize the yen. Harris’s administration would likely stick with measured economic policies, allowing the Federal Reserve to maintain lower interest rates and potentially weakening the dollar, a move that could ease the dollar-yen rate to around 150. A stronger yen would make imports more affordable in Japan, benefiting consumer-driven sectors while introducing challenges for exporters.

Japanese Equities: Contrasting Impacts on Exporters and Domestic Stocks

Tokyo stocks are also on edge, awaiting election results that could significantly impact Japan’s export-heavy economy. Should Trump return to office, Japanese exporters stand to gain from a weaker yen, which would make their products more competitive abroad. However, Trump’s plans for new tariffs on trade partners, especially China, pose risks for Japanese shares. Japan relies heavily on China as its largest export market, and any downturn in China’s economy could ripple through Japan’s export-driven industries.

A Harris administration, on the other hand, may lead to a stronger yen, which could strain exporters by making Japanese goods pricier overseas. Yet, this could prove favorable for consumer-driven sectors in Japan, as the stronger yen would lower the cost of imports, potentially stabilizing domestic markets.

USD/JPY Volatility: Anticipated Swings Around Election Day

The dollar-yen currency pair, a central focus of Asian trading hours, is expected to experience notable volatility around the election. Analysts are watching for possible swings in the USD/JPY rate, with predictions of 154 or higher in the event of a Trump win, while a Harris win might see the pair ease below 151.5. As Yujiro Goto notes, “If Harris wins, the market will react with lower yields and a weaker dollar, and dollar-yen will likely test the 150 level.” For traders, this volatility offers both risks and opportunities, especially as the yen’s safe-haven status could attract demand if the market remains unsettled.

Bond Market Turbulence: Implications for the Bank of Japan

Japan’s bond market, already strained by recent political shifts, faces heightened pressure depending on the election outcome. A Trump victory could amplify a dollar rally, prompting the Bank of Japan (BoJ) to reconsider its stance on yield curve control, especially if higher U.S. yields exert upward pressure on Japan’s borrowing costs. Japan’s internal political landscape—affected by the ruling coalition’s recent loss of majority—may leave the BoJ cautious, potentially requiring it to maintain its accommodative policies if volatility escalates post-election.

Strategic Moves for Investors

For investors in yen-related assets, the U.S. election brings a range of possible outcomes that demand cautious positioning. Analysts recommend reducing position sizes and utilizing stop-loss orders to mitigate risks. The yen, still seen as a safe-haven currency, may attract demand amid heightened uncertainty, and could see sharp, temporary increases if markets remain volatile.

Investor Takeaway: Prepare for Significant Market Shifts

The U.S. election’s outcome is set to shape Japanese assets, with each candidate offering starkly different scenarios for the yen and Japanese markets. For Trump, the focus lies in dollar strength, yen weakness, and potential gains for exporters, but also the risks of trade tensions. Meanwhile, Harris’s policies might strengthen the yen, benefiting consumer sectors while challenging exporters. In this crucial moment, investors with interests in Japanese assets should brace for elevated volatility and strategically position themselves to capture the potential shifts across Japanese financial markets.