Ahead of the US Presidential Election on 3 November, Naoya Oshikubo, senior economist at SuMi TRUST, says a Trump win will preserve the status quo and boost stocks while a Biden win could mean far-reaching changes for Japan:
“If the predicted sweeping win for the Democrats, with victory in the race for the White House and the Senate, occurs then large fiscal projects, which the Democrats have promised, should keep markets excited in the short term. However, higher corporate and capital gains taxes and more regulation in the financial and IT industries could lead the markets to become risk averse in the medium to long term.
“For Japan specifically, a Biden victory may mean very significant changes. Firstly, it could lead to a value reversal in the Japanese stock market. If Biden issues more bonds to finance large scale government projects this could lead to a steeper yield curve with the 10-year US yield rising to 1%. In this scenario the Japanese stock market will likely favor financial stocks, on the expectation that steeper US and Japan yield curves will improve corporate earnings of financial companies given their investments in US and Japanese bonds. Higher spending by the Democrats, funded by bond sales, will also boost the US economy, leading to wider interest rate spreads. This will in turn push the US dollar higher against JPY, benefiting Japanese exporters and their shares.
“Secondly, Biden’s environmental policies could benefit Japanese environmental technology companies with a strong ESG focus due to an increase in demand from America for their products. As such, valuations of such companies may rise. Thirdly, while Biden will have a tough stance on China he is likely to take a more concerted, international approach, building a coalition of allied nations to counter China. Japan would be asked to join and commit itself. However, China is an important business partner for Japan so this would create a challenging situation for Japanese diplomacy.
“The probability of Trump winning has diminished somewhat, but if we recall 2016 we can’t count him out. A Trump victory means no real change for Japan and this will also be positive for stocks as it will be seen as ruling out the possibility of higher corporate taxes.
“A final scenario for markets to consider is the case of no clear winner. The election results could take days to be announced, with potential controversy around postal votes. If delays mount, both sides might refuse to accept defeat. Without a clear winner the uncertainty will delay government projects and could well be the worst scenario for the markets. Global stocks would plunge and investors would pile into JPY as a safe haven, causing the USD/JYP exchange rate to fall towards the 100 range. Although the dollar would still remain relatively strong against many other currencies, the yen would as usual be the strongest, creating an intense headwind for Japanese exporters.”
Jenny has been reporting on small business issues since 2001 where she held a number of freelance positions across the leading SME publications in the UK. Specialist subjects included SME financing and tax.