Yen is first of many Japanese assets set to pivot on US election

A VICTORY for Kamala Harris in the US presidential election has the potential to support Japan’s ailing currency while a win for Donald Trump would probably boost the Tokyo stock market and put the yen at risk of a deeper slump.

That’s just two of the many possible market outcomes as investors and analysts sketch multiple scenarios for the trajectory of Japanese assets.

They caution that the risk of a contested result in the election means that regardless of who initially appears to come out on top, a period of heightened volatility is likely.

Japan will be in particular focus as votes are counted in the US, given the size and liquidity of its markets, and the heavy focus on the US dollar-yen currency pair during Asian trading hours.

A Harris win will likely see her stick with the status quo on economic policy, pursuing a soft landing for the US. Barring a sharp acceleration in inflation, that would clear the way for the Federal Reserve to cut interest rates. The yen in turn would likely strengthen as Japan’s yield gap with the US narrows.

Trump’s return to power, by contrast, could bolster the US economy, at least in the short term, given his call for lower taxes and looser business regulations. That has the potential to help Japanese exporters while encouraging US dollar buying.

But his plans to impose new tariffs on trading partners are seen as a risk for Japanese shares. Republicans’ performance in Congressional elections is another focus.

“If Harris wins, the market will react with lower yields and a weaker US dollar, and US dollar-yen will likely test the 150 level,” Yujiro Goto, head of foreign-exchange strategy at Nomura Securities, wrote in a note.

“If there’s a red sweep, US dollar-yen may test a rise above 155, and the focus would be on whether Japanese authorities conduct a verbal intervention,” he said, referring to the Republicans taking control of Congress in addition to Trump winning.

Strategists at Credit Agricole and Mizuho Bank are predicting that the yen may slide towards 160 if Trump is the victor, near its 38-year low against the US currency marked in July.

Polls released on Sunday (Nov 3) show Harris and Trump remain poised for a close finish in this week’s election, with voters narrowly split both nationally and across the key swing states that will decide the outcome. As betting markets trimmed their odds on a Trump win, the US dollar weakened and US Treasuries rallied as some polls suggested that Harris has a slight edge nationally and in some battleground states.

The outcome of the US vote looks set to add to market volatility in Japan, where the ruling coalition’s loss of majority in the lower house election led to sharp swings in domestic asset prices. One-week implied volatility of the US dollar against the yen has risen to the highest level since early August when the Bank of Japan’s rate hike led to sharp gains in the yen.

A boost to Japanese stocks on a Trump win might be short-lived if the Republican former president introduces new tariffs. If China is targeted, that may drag on the Japanese economy because it remains the country’s biggest export market. Many Japanese firms have long relied on strong Chinese growth to bolster their earnings.

“If Trump wins and the closer we get to the red wave, the larger US fiscal spending will be, so the initial reaction will be a stronger US dollar and higher share prices,” said Masahiko Loo, senior strategist at State Street Global Advisors. “When he starts to talk about tariffs, we will likely see risk-off trade and stocks losing momentum.”

On top of 60 per cent on Chinese goods, Trump has floated the idea of 10 to 20 per cent duties on all imports, which would deal a blow to Japan’s exports of cars, machines and electronics to the US. If other countries retaliate with similar tariffs, that could slow global economic growth, hurting many Japanese firms that have been expanding overseas to make up for weak demand at home. BLOOMBERG