Donald Trump’s anticipated return to the presidency is set to invigorate Tokyo’s stock market as we approach early next year, largely fueled by his proposed tax cuts and protectionist policies that are expected to exacerbate the weakening of the yen, thereby providing a significant boost to exporter shares in Japan.
However, the sustainability of this buying momentum hinges on the extent to which Trump follows through on his policy agenda once he assumes office and the subsequent effects on inflation levels within the United States. Additionally, his plans to implement increased tariffs may pose challenges for Japanese businesses operating in various sectors.
“The initial reaction (to the election outcome) is likely to be higher stocks, as market sentiment will be bullish in the honeymoon period of some 100 days through early next year,” explained Masahiro Yamaguchi, head of investment research at SMBC Trust Bank, highlighting a period of optimism that typically follows a presidential election.
He projects the Nikkei stock index may climb as high as 44,000 early next year, spurred by Trump’s commitment to restricting immigration, which is also likely to heighten inflationary pressures and further devalue the yen.
A television screen on a street in Tokyo’s Yurakucho district shows a news report on Nov. 6, 2024, about former U.S. President Donald Trump being assured of victory in the presidential election. (Kyodo)
In the foreign exchange market, the U.S. dollar is expected to surge from its current level of 153 yen. Should the Republicans secure full control of Congress, Trump’s tax cut initiatives could materialize, leading dealers to predict widening fiscal deficits that could destabilize the economy.
“A Republican sweep could push the dollar back up to the 160 yen level,” cautioned Yukio Ishizuki, senior foreign exchange strategist at Daiwa Securities Co., emphasizing the potential for increasing deficits and high inflation to elevate U.S. interest rates considerably.
However, should the dollar strengthen excessively, analysts predict a possible correction next year, with likely scenarios of retreating back to the 140 yen range as market participants begin to mitigate the risks associated with Trump’s trade policies.
Trump has delineated a strategy to implement blanket tariffs ranging from 10 to 20 percent on nearly all imports, alongside imposing 60 percent tariffs specifically on goods imported from China. This move aims to bolster the domestic manufacturing sector amidst concerns of economic stability.
His mass deportation plan for undocumented migrants is anticipated to exert upward pressure on inflation by constricting the available workforce, which may result in heightened wage demands, according to analysts monitoring these developments.
Beyond his tax cuts, Trump’s immigration and fiscal policies are projected to accumulate debt levels soaring to $7.75 trillion—almost double the forecast projected under his Democratic competitor, Kamala Harris—reflecting on the long-term economic implications of his governance.
The heightened inflationary environment presents complications for the Federal Reserve, potentially restricting the central bank’s ability to implement interest rate cuts. Consequently, this scenario is likely to bolster a strong dollar against the yen amid the anticipated large rate differentials between the United States and Japan.
While Maki Sawada, a strategist within Nomura Securities Co.’s Investment Content Department, acknowledged the potential risks posed to Japanese stocks due to the political transition, she highlighted the multifaceted impacts Trump’s administration could have on the Japanese market.
Despite potential initial boosts, analysts pointed out that Trump’s proposed policies could pose a double-edged sword for Japanese equities, as they risk undermining personal consumption and decelerating economic growth in the world’s largest economy.
For Japanese manufacturers, adherence to Trump’s trade policies may necessitate a strategic relocation of production bases, particularly for those currently situated in China that primarily export goods to the United States.
“His protectionist policies are the biggest concern,” Sawada acknowledged, highlighting the financial burdens Japanese manufacturers may encounter in adapting to these new measures.
Companies in the burgeoning green technology sector, including those engaged in electric vehicle battery production and renewable energy infrastructure, could face considerable obstacles, given Trump’s intention to roll back environmental regulations in favor of traditional energy sources like oil and coal.
Following the initial market uptick, investor attention is likely to pivot back towards corporate performance, with numerous companies anticipated to report growing profits over this fiscal year and the next, as the yen remains significantly cheaper compared to levels observed three years prior.
“Continued expansion in corporate earnings will have a positive effect on the market,” noted SMBC Trust Bank’s Yamaguchi, while also cautioning that prevailing uncertainties regarding the feasibility of Trump’s policy initiatives may create hesitancy among investors looking to engage actively.
“As for the next year, I expect the market to remain flat or see only modest gains,” Yamaguchi concluded, indicating a cautious outlook as the market adapts to evolving economic conditions.
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**Interview with Masahiro Yamaguchi, Head of Investment Research at SMBC Trust Bank**
**Interviewer:** Welcome, Masahiro. It’s great to have you here to discuss the recent developments in the stock market following Donald Trump’s victory in the presidential election. As you mentioned, there seems to be a promising outlook for the Tokyo stock market. Can you elaborate on the factors driving this optimism?
**Masahiro Yamaguchi:** Absolutely, thanks for having me. The market’s initial response to Trump’s anticipated return has been quite bullish, largely driven by his proposed tax cuts and protectionist policies. Increased exports, particularly for Japanese manufacturers, stand to benefit significantly from a weaker yen, which can boost their competitiveness abroad. I project we could see the Nikkei stock index climb as high as 44,000 in the early part of next year.
**Interviewer:** That’s a robust prediction. However, what do you see as the potential risks or challenges to sustaining this momentum?
**Masahiro Yamaguchi:** That’s a critical point. The sustainability of this buying momentum depends heavily on Trump’s ability to deliver on his policy agenda and the impact of those policies on inflation in the U.S. His proposed tariffs could pose challenges for Japanese businesses, particularly those exporting to the U.S. market. Additionally, if inflation runs high and leads to rising interest rates in the U.S., that could strengthen the dollar further against the yen, which might complicate things for Japanese exporters.
**Interviewer:** You mentioned higher inflation levels—how do you foresee this affecting the overall economic landscape in Japan?
**Masahiro Yamaguchi:** The inflationary pressures stemming from Trump’s policies, especially his immigration and trade strategies, could potentially constrain Japan’s economic growth. While initially, we might see a boost in investor sentiment, the long-term implications on personal consumption and overall economic stability could be concerning. If consumer spending weakens, it might offset the gains we’ve seen in the export sector.
**Interviewer:** Yukio Ishizuki from Daiwa Securities pointed out the risks of increasing fiscal deficits under a Republican-led government. How do you perceive this issue in the context of the Japanese market?
**Masahiro Yamaguchi:** Yes, if the Republicans secure full control of Congress, we could see substantial tax cuts and increased deficits, which may ultimately destabilize the economy. A strong dollar could result from widening fiscal deficits and high inflation, and while that might initially seem favorable for U.S. companies, it could result in a correction for Japanese equities. Investors will likely begin to reassess their positions as they weigh these risks against any early gains.
**Interviewer:** Lastly, what advice would you give to investors looking to navigate these uncertain waters over the coming months?
**Masahiro Yamaguchi:** I would advise cautious optimism. While the initial reaction may be bullish and beneficial for exporters, it’s crucial to stay informed about the evolving political landscape and its potential ramifications on market conditions. Keeping an eye on U.S. inflation data, interest rates, and trade policies will be essential in making informed investment decisions. Diversification and risk management will also be key strategies in this environment.
**Interviewer:** Thank you, Masahiro, for your insights. It will be interesting to see how these developments unfold in the coming months.
**Masahiro Yamaguchi:** Thank you for having me!
