Global currency markets are facing a dual political shock: on one side, Trump's trade threats are pressuring the U.S. dollar, while on the other, Japanese Prime Minister Takaichi's fiscal stimulus is weighing down the yen. According to information from Zhui Feng Trading Desk, a report released on January 19 by Nomura Securities' global market research team indicates that the current foreign exchange market is being dominated by the political agendas of the United States and Japan. Despite resilient U.S. economic data, political risk is becoming a core driver of dollar weakness; in Japan, despite global risk-off sentiment, the yen has failed to act as its traditional 'safe haven,' instead being sold off due to expectations of aggressive domestic fiscal policy. Trump's "Greenland Tariffs" Hammer the Dollar The Nomura report points out that Trump's hardline stance on the acquisition of Greenland has triggered a new round of U.S.-Europe trade conflict. Trump announced that if European countries do not cooperate with his decision regarding Greenland, additional tariffs will be imposed on eight European countries starting February 1. According to a CCTV news report, U.S. President Trump recently stated that he would impose an additional 10% tariff on eight European countries opposing his acquisition of Greenland, increasing to 25% several months later, until an agreement on the "complete and total purchase of Greenland" is reached. This geopolitical tension directly hit market risk sentiment at the start of the week. While U.S. stocks fell, the dollar did not rally as a safe haven as it often does; instead, it weakened broadly against G10 currencies. Nomura analysts noted that this market reaction is strikingly similar to the "Tariff Liberation Day" of April 2025. This sends a clear signal to investors: "Despite recent resilient U.S. data, political-level risks could weaken the dollar this year." For the full year 2025, the U.S. dollar index plummeted by approximately 9.5%. Takaichi's "Surprise" Tax Cuts Pressure the Yen Against the backdrop of a weaker dollar, the yen has not shown significant strength among G10 currencies; instead, its exchange rate broke through the 158 level, approaching the key 160 mark. Nomura attributes this primarily to domestic political factors in Japan, specifically a policy shift by Prime Minister Takaichi. According to a Xinhua News Agency report, Japanese Prime Minister Takaichi stated at a press conference on the 19th that she would dissolve the House of Representatives on January 23 and seek a voter mandate to continue governing, with the House of Representatives election scheduled for February 8. The term for members of the current House of Representatives was originally set to expire in October 2028. While the election itself had been largely priced in by markets, the economic platform she proposed came as a surprise. "She confirmed plans to temporarily cut the food consumption tax for two years, a move that surprised the market." Nomura emphasized that during last year's LDP leadership election, Takaichi held a negative view of tax cuts, believing they would not have an immediate effect. However, to win the upcoming House of Representatives election, this policy appears to have become a core measure of her "responsible and proactive fiscal policy" platform. Given that the main Japanese opposition party (the Centrist Reform Alliance) has also proposed permanently abolishing the food consumption tax, both ruling and opposition parties in Japanese politics seem to be racing to include tax cuts in their campaign platforms. JGB Sell-Off Intensifies Yen Weakness This shift towards tax-cut policies has directly sparked market concerns about a deterioration in Japan's fiscal health. Nomura notes this is a key factor leading to the sell-off in Japanese Government Bonds (JGBs) and dragging down the yen. Data shows that the Japanese government bond yield curve exhibited a "bear steepening" pattern on January 19, with the 10-year JGB yield climbing to 2.270%. Nomura warns investors that, considering there are multiple long-term and ultra-long-term bond auctions remaining during the campaign period, including tomorrow's 20-year bond auction, sharp volatility in long-end rates could further increase downward pressure on the yen, similar to last year. Despite market concerns about fiscal discipline, Takaichi's political gamble appears to be paying off in terms of votes. According to an early poll conducted by the Asahi Shimbun on January 17-18, the ruling coalition composed of the LDP and Japan Innovation Party (LDP-JIP) holds an advantage over the main opposition parties. 69% of respondents believed the new opposition party, the "Centrist Reform Alliance," could not become a strong contender for the ruling coalition. Nomura concluded that, based solely on this result, Takaichi's coalition is highly likely to secure a majority in the upcoming general election. However, analysts also cautioned investors: "The survey results should not be overinterpreted, as the election landscape can change easily." ~~~~~~~~~~~~~~~~~~~~~~~~ The above highlights are from Zhui Feng Trading Desk. For more detailed interpretation, including real-time analysis and frontline research, please join the [Zhui Feng Trading Desk ▪ Annual Membership].
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