Donald Trump's stunning election victory delivers yet another blow Prime Minister Shinzo Abe's efforts to revive Japan's economy, underscoring the vulnerability of Abenomics to fluctuations in the yen and financial markets.
Fears of a hard landing in China and the Britain's Brexit vote sent investors fleeing risk assets earlier this year, with many seeking the perceived safety of the yen, in the process eroding the profits of Japan's exporters and the central bank's inflation goal. The currency surged again as investors reacted to Mr. Trump's win during Asian trading, though the rally eased as the European morning began.
Mr. Trump's win all but dooms the Trans-Pacific Partnership trade agreement, which could have boosted Japanese manufacturers. Mr. Abe was also counting on the pact as a catalyst for long-promised structural reforms in protected sectors of the economy.
"This is a critical moment for Abenomics," said Yasunari Ueno, the chief market economist at Mizuho Securities Co. in Tokyo. "A huge political obstacle has suddenly fallen in front of it."
The election result also raises the chance of the Bank of Japan implementing further monetary easing in January because it lowers the prospects of an interest-rate increase by the U.S. Federal Reserve in December, said Yasuhiro Takahashi, an economist at Nomura Securities Co. in Tokyo. Expectations of a Fed hike had strengthened the dollar recently.
Any changes by the BoJ come with risks, given the unpopularity of its negative policy rate, and the difficulties it would face if it chose to increase asset purchases.
Difficulties facing the central bank could also force the Abe government to increase fiscal stimulus, even as it seeks to contain swelling debt.
Mr. Trump himself may boost U.S. fiscal stimulus and, in time, pressure the Fed to raise rates, which could be part of an alternative scenario for Japan, strengthening the dollar versus the yen, offering Mr. Abe some much needed respite.
For now though, the yen is about 16 per cent higher than it was at the start of 2016.
Masatsugu Asakawa, who oversees currency policy as Japan's vice-minister of finance, said as the election result came through that officials in Tokyo were poised to take action if what he termed "harsh" and "speculative" market moves continued.
Yet Mr. Trump's victory may also make it more difficult for Japan to intervene. The yen's strength and Japanese talk of intervention has already been a source of tension between Japan and Obama administration officials this year. Mr. Trump has taken a more aggressive stance, criticizing Japan and China for what he termed currency manipulation that puts U.S. companies at a disadvantage.
"Japan will have no choice but to intervene if the yen goes up to 95 or 90 rapidly but Trump makes it more difficult to convince U.S. authorities about the need for action," said Daiju Aoki, economist at UBS Group AG. "The same goes for the BOJ."
The yen traded at 103.24 per U.S. dollar at 7:17 p.m. in Tokyo. The Topix stock index closed 4.6 per cent lower, its biggest drop since Britain's Brexit vote in June.
Some economists cautioned that Congress could provide a check on Mr. Trump. Maiko Noguchi, economist at Daiwa Securities Group Inc. and a former BoJ official, said the market turmoil seen on Wednesday may be short-lived. "Trump said radical and controversial things during the campaign, but I don't think he can make them come true after becoming president," she said.
A Trump presidency also likely means the death, at least in its current form, of the Trans-Pacific Partnership, which Abe has touted as an important element of his economic plan. Trump has pledged to renegotiate existing U.S. trade deals and compared TPP -- a multilateral deal that has been signed by member nations but not enacted – to rape.
"Renegotiation of TPP is inevitable now," said Ueno of Mizuho Securities. "Americans made this choice. Beyond that, uncertainty is blanketing the global frameworks. You wonder about the relationship between Trump and Russia and the relationship between Trump and China. You also wonder if the costs of the U.S.-Japan alliance will be re-examined."
For now, downside risks are on the rise, and that will add to the difficulties of policy makers in Japan, who have already seen their policies "stretched," said Betty Rui Wang, northeast Asian economist at Standard Chartered Bank in Hong Kong.
"If they still stick with the current policy framework, rolling out more fiscal stimulus from the government side, and continue the current monetary policy framework, I would think they are probably short of good measures," she said.