The yen fell sharply against the dollar on Tuesday, slipping over 1%, as early election results from the United States appeared to hint at a potential advantage for Republican candidate Donald Trump over Democratic incumbent Kamala Harris. The currency’s dip, coinciding with an uptick in Japanese stock markets, underscores the volatile economic landscape fueled by international political outcomes. Japan’s Nikkei and Topix indexes both climbed, as financial stocks and semiconductor shares lifted Tokyo’s trading atmosphere in the face of anticipated economic policy changes.
The dollar strengthened against the yen, rising to 153.22 yen, representing a 1.1% increase and reversing gains made by the Japanese currency over the past two days. Tokyo traders closely monitored the U.S. vote count, noting that a potential Trump victory could lead to a more expansive economic approach from the U.S., driving inflation and decreasing the Federal Reserve’s chances of steep interest rate cuts. In contrast, market analysts suggest that a Harris victory could prompt further Fed rate cuts, favoring the yen in a rally against the greenback.
Yugo Tsuboi, chief strategist at Daiwa Securities, commented on the early results, noting, “The markets are starting to bet on a return of Trump. His margin is wider than the forecast in Florida, a populous state, raising expectations that the Republicans may be doing better elsewhere.” The sentiment of traders and investors has since shifted, with many recalibrating their strategies based on potential impacts on currency and equity markets in Japan and globally.
The surge in Japanese stock prices further mirrors optimism among investors who anticipate a Trump administration would focus on domestic economic growth, an agenda likely to impact international trade dynamics and, in particular, the U.S.-Japan exchange rate. Japanese tech stocks, sensitive to shifts in American economic policy, saw substantial gains, propelling the Nikkei 225 index up by 2% and the Topix index by 1.7% by midday trading. Financials and semiconductor sectors saw a particularly strong upswing as international demand for Japanese chip-related products grew in anticipation of a more aggressive U.S. economic expansion.
Japan’s 10-year government bond futures fell by seven ticks while the benchmark yield on cash debt held steady at 0.935%, a stabilization that reflects traders’ current watchfulness over U.S. election outcomes. The yen’s drop against the dollar is shaping up as one of the largest swings in the Japanese currency pair this year. The implied overnight volatility on the dollar-yen pair rose to 36.5% in early Tokyo trade—approaching a one-year peak of 39.1% reached in August during a major Japanese stock market correction.
Despite the dollar’s rise, currency strategists expect the yen may still recover against the greenback if Harris clinches a victory. Her administration’s dovish stance on monetary policy would provide the Federal Reserve more latitude to lower interest rates, making it easier for the yen to strengthen against the dollar in the near term.
Japanese equity markets have wrestled with price fluctuations since early summer, as the yen’s value rebounded following a slump to multiyear lows. The sharp August 5 plunge in the Nikkei and Topix, both of which fell by 12%, underscored investor concerns about borrowing costs and the currency’s volatility. The current rally, however, provides a respite, with investors buoyed by Trump’s election momentum, banking on his potential focus on growth-oriented policies that could indirectly benefit Japanese exporters.
Beyond the implications of the U.S. election, Japan is grappling with its own political and economic shifts. The yen’s depreciation, while stimulating Japan’s export sector, has also contributed to a rise in imported inflation, intensifying pressure on the Bank of Japan (BOJ) to raise interest rates. Many economists speculate that the BOJ could initiate rate hikes as early as December to counter inflationary trends.
The BOJ’s policy of keeping borrowing costs ultra-low for years has encountered a turning point. Japan’s Liberal Democratic Party (LDP), reeling from a recent loss of its majority in the Lower House, must form a coalition to maintain governance stability. The political uncertainty, combined with potential BOJ rate hikes, has driven volatile trading in domestic assets, adding another layer of complexity for investors already facing unpredictable U.S. election-related currency movements.
“Interest rate hikes by the BOJ would mark a significant pivot in Japan’s monetary policy landscape,” noted Hiroshi Kitamura, a senior economist at SMBC Nikko Securities. “But if Trump wins, it could actually ease the burden on Japan, allowing the BOJ some breathing room to defer further hikes due to a potentially softer yen.”
Japan’s economy has enjoyed a surge in growth, driven largely by the yen’s weakness against the dollar. While beneficial for exporters, the weakening yen has complicated the inflation landscape, placing pressure on the BOJ to revise its longstanding ultra-loose policy. With consumer prices gradually rising, a Trump victory in the U.S. could signal a period of sustained inflation that the BOJ might counter by tightening monetary policy.
Despite Japan’s financial landscape showing signs of renewed growth, concerns remain about the resilience of Japanese markets. In particular, the heavy exposure of Japanese equities to global markets and the yen-dollar currency pairing leaves Japan vulnerable to any drastic U.S. policy shifts.
The BOJ’s next policy meeting in December will likely factor in the outcomes of the U.S. presidential election, balancing the yen’s volatility with economic goals. While a Trump administration may afford Japan some leeway to avoid steep interest rate hikes, a Harris administration may compel the BOJ to pursue a more proactive tightening policy in alignment with global economic conditions.
