Impact of Trump's Potential Return on Tokyo Stocks

Donald Trump's likely return to the U.S. presidency is anticipated to boost Tokyo stocks as we head into early next year. His proposed tax cuts and protectionist policies are expected to weaken the yen, which would be advantageous for companies that export goods.

However, the sustainability of this stock market rally will depend on how effectively Trump implements his policy agenda after taking office and the extent to which it influences inflation levels in the United States. His plans to raise tariffs could negatively impact Japanese businesses.

According to Masahiro Yamaguchi, who leads investment research at SMBC Trust Bank, the initial response to the election outcome is expected to be positive, driving stock prices higher during what he calls the "honeymoon period," which typically lasts about 100 days post-election. He predicts that the Nikkei stock index could rise to as high as 44,000 by early next year as Trump's immigration policies are likely to contribute to inflation and a decline in the yen’s value.

A television screen in Tokyo's Yurakucho district shows news of Trump's election victory.

In foreign exchange markets, analysts believe the U.S. dollar could strengthen from its current value of 153 yen. If Republicans gain full control of Congress, Trump will likely have a clearer path to implement his tax cut proposals, potentially leading to increased fiscal deficits. Yukio Ishizuki, a senior foreign exchange strategist at Daiwa Securities Co., suggests that a Republican sweep could push the dollar up to 160 yen.

However, this surge may not last, as market participants might seek to reduce risk from the adverse effects of Trump's trade policies, possibly bringing the dollar back down to around 140 yen next year.

Trump's aggressive stance includes plans to impose tariffs of 10 to 20 percent on nearly all imports and significant tariffs on Chinese goods, aiming to bolster the domestic manufacturing sector. Furthermore, his immigration policies may increase inflation by tightening the labor market and raising wages.

In addition, a recent study from the nonpartisan Committee for a Responsible Federal Budget forecasts Trump's tax cuts and other policies could increase the national debt by $7.75 trillion, which is nearly double the projected increase under his Democratic rival, Kamala Harris.

The rising inflation could hinder the Federal Reserve's ability to cut interest rates, thus maintaining a robust dollar in comparison to the yen, as the interest rate gap between the two countries may persist.

Maki Sawada, a strategist at Nomura Securities Co., acknowledges that the transition to a new administration could pose risks for Japanese stocks due to uncertainties. However, she notes that a weaker yen would generally be beneficial for Japanese companies' earnings.

Despite these potential advantages, Trump's policies may also be a mixed blessing for Japanese equities. Analysts express concerns that his trade measures could hurt consumer spending and slow down the global economy. Japanese manufacturers may have to shift production from places like China if tariffs become prohibitive.

During Trump's previous term, his aggressive trade policies led to several tariffs, influencing stock prices globally and causing investors to seek refuge in the yen as a safe-haven currency.

Industries focused on green technologies, including electric vehicles and renewable energy, could also face challenges due to Trump’s inclination to rollback climate regulations that favor traditional energy sectors.

After an initial rise in stock values, the focus of investors is projected to return to corporate profitability. Many firms are expected to see earnings growth this fiscal year and into the next as the yen remains significantly weaker than it was a few years ago.

Yamaguchi at SMBC Trust Bank remains optimistic, suggesting that ongoing growth in corporate earnings could positively influence market conditions. However, he cautions that uncertainties surrounding Trump's policy effectiveness might cause investors to approach buying with caution.

He predicts that, overall, the market could remain stable or see only modest increases next year.

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Stocks, Trump, Tokyo