Japan’s blue-chip stock gauge rallied more than 3% while the yen slid to the weakest since July as early results of the US presidential election led some traders to wager that Donald Trump has an edge over Kamala Harris.
Investors see the yen as likely to extend its drop on a Trump victory because his economic policy is seen as more expansionary and inflationary than that of Harris, making it less likely for the Federal Reserve to aggressively cut interest rates.
Japanese markets are in particular focus as votes are counted in the US, given their size and liquidity, and the heavy focus on the dollar-yen currency pair during Asian trading hours.
The yen weakened 1.2% to 153.48 per US dollar at 2pm in Tokyo, reversing its advance for the past two days. Japanese share prices rose, with the tech-heavy Nikkei 225 climbing 3.1% at one point before trimming the move. The broader Topix index was up 1.6%, with gains seen in financials and chip-related stocks.
“Dollar-yen can gain further ground if the results continue to point to a Trump victory and equity markets continue to focus on his pro-growth policies,” said Carol Kong, a strategist at Commonwealth Bank of Australia. “I’d just caution dollar-yen can unwind all the gains if equity markets turn their focus to the prospect of another trade war between the US and China.”
Japan’s 10-year government bond futures extend their decline, dropping 43 ticks to 143.84. While the 10-year benchmark cash debt yield was unchanged at 0.935%, yields on longer-maturity debt rose.
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“The markets are starting to bet on a return of Trump,” said Yugo Tsuboi, chief strategist at Daiwa Securities Co. “His margin is wider than the forecast in Florida, a populous state, raising expectations that the Republicans may be doing better elsewhere.”
Traders are still on guard for large swings in dollar-yen. The implied volatility on the overnight dollar-yen option jumped to 36.5% in early trade, near a one-year peak of 39.1% hit during the Japanese stock market’s meltdown in early August. It later reversed the move.
Japanese shares have failed to climb back to record levels hit in July as the yen’s recovery from its nadir that month and rising borrowing costs weighed on sentiment. A 12% plunge in both the Topix and Nikkei indexes on Aug 5 was a reminder that Japan’s recently high-flying stocks have a lot of room to fall if investor sentiment turns pessimistic.
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BOJ implications
Still, Takatoshi Itoshima, a strategist at Pictet Asset Management Japan, said he’s become bullish on the nation’s equities, “For all the talk about the Trump trade, I don’t think many investors have ridden on that wave yet,” he said.
The yen’s persistent slide in recent years has been fueling imported inflation, putting pressure on the central bank to raise borrowing costs and adding to the woes of Japan’s Liberal Democratic Party, which needs to forge a new coalition after losing a majority in the Lower House in an election last month.
Many economists expect the Bank of Japan to raise interest rates as early as December.
The US election results add to market volatility facing Japanese investors who are trying to adjust to the end of the BOJ’s super-easy monetary policy.
The ruling coalition’s loss of its majority led to sharp swings in domestic asset prices. Uncertainties about the coalition’s fate are also making investors cautious about betting on further BOJ rate hikes.
A pause in rate increases may reassure global investors who are concerned about the possibility that Japanese asset owners might bring their cash home if returns improve.
Chart: Bloomberg
