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Within hours of Donald Trump securing his victory in the United States, the Japanese media used the term matatora — the third Trump-related entry in the Japanese dictionary of growing unease over his possible return.
The first word of the sequence, moshitora (“What if Trump?”), was topical in the last months of 2023 and set a tone of underlying nervousness in government, corporate and market circles. The second, hobotora (“most likely Trump”), has been widely used this year, calling for more serious concerns around geopolitics, inflation and trade risk. Matatora (“Trump is back”) grants a blanket license to gawk.
For some, however, the word has unleashed a bullish snort and an argument that (without becoming embroiled in a regional conflict or some other unforeseen calamity) Japan may be better positioned than almost any other developed market outside the United States to flourish in the next few years.
Tokyo stocks, declares Neil Newman, a strategist who has been covering Japan since the 1980s, have rarely been so primed to soar. In any case, he says, the political paralysis that will arise from Japan’s complicated general elections last month, and the implicit guarantee that bad policies will not be adopted, should only make the market more attractive to large global funds.
It’s a seductive argument, given added gloss by the various volatile knee-jerk market moves in Tokyo that accompanied Wednesday’s news: gains for exporters (under the assumption of an even weaker yen), defense industry stocks (Trump will require allies to spend more on their militaries), banks (inflation will rise and so will interest rates), and companies that will benefit from the relocation (likely accelerated while Trump is in power) of Japan’s semiconductor industry.
CLSA strategist Nicholas Smith also sees the prospect of a six-month boost for Japan as animal spirits boost the financial sector. Global capital spending, frozen in the run-up to the US elections, should now unfreeze quickly, favoring Japan.
However, the long-term case for Japanese stocks under Trump depends on two main lines of reasoning. The first is that Shanghai and Hong Kong’s loss will be Tokyo’s gain. Relations between the United States and China under the Biden administration have not been good and there is reason to expect them to worsen under the Trump administration. US pension funds have already been pressured to halt or withdraw investments, while China-based deals led by US private equity have remained virtually silent. Some American pension money may have returned to Hong Kong and China in recent months, but that could quickly be reversed under Trump. Crucially, flows may well be diverted to Japan by default, as the only developed market in Asia with the breadth and depth to absorb them.
A second argument is that Japan’s recent descent into political stagnation (the ruling Liberal Democratic Party and its leader, Shigeru Ishiba, have yet to form a functioning government) is not, for the stock market, a big problem. Ishiba and his party are too weak to disrupt the economy’s momentum or derail progress on the corporate governance reform and restructuring that so attracts foreign investors.
There are clearly powerful counterarguments to all of this, including the possibility that the Trump administration is associated with such high levels of geopolitical uncertainty that investors turn to the type of risk-averse trading patterns that tend to reduce exposure to Japan.
And while Japan may indeed be geared toward global growth, a big part of that is its exposure to China. Even if Japanese companies manage to fight their way through higher tariffs and heightened “choosing sides” rhetoric from Washington, China itself could be far less rewarding than in the past.
On the political front, the risks surrounding Ishiba’s disastrous bid for a general election could prove much greater than Newman and other bulls assume. The price to be paid for the prime minister’s weakness—the inability to communicate the importance of Japan to Trump, or to present himself as someone likely to remain in the country long enough to make it worth Trump’s concern—will be high.
Since early 2024, when the Nikkei 225 average finally surpassed the record set in 1989, the mantra of brokers has been that Japan is back. A succession of large American and European long-term funds have come to Tokyo to see for themselves that the sales pitch is true. An increasing number seem to have returned convinced, but without the kind of comfort levels necessary for a really large reassignment to Japan. In any case, they had been holding fire until after the US elections.
Trump is Back can ensure that Japan is left behind. It can also set Japan back a lot.