If former U.S. President Donald Trump is re-elected, it is expected to boost Tokyo stocks, especially as his proposed tax cuts and protectionist policies could further weaken the yen, benefiting Japanese export company stocks. However, there are doubts about the sustainability of this rise, particularly regarding the extent to which Trump will implement his policies after taking office and their potential impact on U.S. inflation. Trump’s plan to increase tariffs could negatively impact Japanese companies.

Masahiro Yamaguchi, Head of Investment Research at SMBC Trust Bank, stated that the initial reaction to Trump’s victory would likely be a rise in stocks as market sentiment remains optimistic through the “honeymoon period” early next year. He projects that the Nikkei index could rise to 44,000 points early next year, as Trump’s pledge to restrict immigration may add inflationary pressure, further weakening the yen.

In the foreign exchange market, the U.S. dollar is expected to rise from the current 153-yen level. If Republicans gain full control of Congress, Trump’s tax cut plans may be implemented, potentially widening the fiscal deficit. Yukio Ishizuki, Senior Foreign Exchange Strategist at Daiwa Securities, commented that a Republican majority could push the dollar up to 160 yen, although the excessive strength of the dollar may correct next year, possibly falling back to around 140 yen depending on whether market participants adjust risks to avoid the adverse impact of Trump’s protectionist trade policies.

Trump has promised to impose general tariffs of 10% to 20% on nearly all imports, along with tariffs as high as 60% on Chinese goods, to strengthen U.S. manufacturing. Analysts believe Trump’s large-scale deportation plan for undocumented immigrants may also increase inflationary pressure, as it would reduce the workforce and lead to higher wages.

According to a recent study by the non-partisan Committee for a Responsible Federal Budget, Trump’s tax cuts and immigration policies could increase U.S. debt by $7.75 trillion, nearly double the estimate for his Democratic rival, Kamala Harris.

The increase in inflationary pressure may make it difficult for the Federal Reserve to proceed with interest rate cuts, keeping the dollar strong against the yen as the interest rate gap between the two countries is likely to be maintained. Maki Sawada, Strategist at Nomura Securities’ Investment Content Department, pointed out that the change of administration may pose risks to Japanese stocks due to policy uncertainty.

Sawada also noted that a weaker yen would be the biggest positive factor for Japanese company earnings, thus supporting stock prices. A weaker yen boosts the earnings of export-oriented companies when overseas profits are repatriated. However, analysts warned that Trump’s policies could be a double-edged sword for Japanese stocks, as they may impact U.S. consumer spending and slow down the world’s largest economy.

For Japanese companies, Trump’s trade policies could force manufacturers to relocate production bases, particularly those in China producing goods for the U.S. market. Sawada noted that Trump’s protectionist policies are a major concern, as Japanese manufacturers may bear additional costs to adapt to these measures.

During his previous term in 2018 and 2019, Trump’s aggressive stance on China led to multiple rounds of tariffs, triggering global stock plunges and pushing investors to seek the yen as a safe-haven asset. Analysts also noted that companies in green technology, including electric vehicle batteries and renewable energy infrastructure, may face headwinds, as Trump’s promise to roll back climate policies would favor traditional energy sources like oil and coal.

Following the initial rise in the stock market, investors’ attention will shift back to corporate performance, with many companies expected to see profit growth this fiscal year and the next, as the yen remains significantly cheaper compared to three years ago. Yamaguchi commented that continued corporate earnings expansion will positively impact the market, but concerns over the feasibility of Trump’s policies may make investors hesitant to actively buy stocks. Overall, Yamaguchi expects the market to remain flat or see only modest gains next year.