Is this a currency war? Trump attacks the dollar, and Takamori Saema weakens the yen
Nomura analysis indicates that Trump's imposition of tariffs on Europe due to the Greenland dispute has weakened the dollar due to political risks; meanwhile, Japanese Prime Minister Sanae Takaichi unexpectedly shifted to aggressive tax cuts to win the early election on February 8, raising market concerns about Japan's fiscal deterioration. This concern has led to a surge in Japanese government bond yields, which in turn has suppressed the yen's performance in a risk-averse environment
The global foreign exchange market is facing a dual political shock: on one side, Trump's trade hammer is pressuring the dollar, while on the other side, Japanese Prime Minister Sanae Takaichi's fiscal stimulus is dragging down the yen.
According to news from the Wind Trading Desk, a report released by Nomura Securities' Global Markets Research team on January 19 indicates that the current foreign exchange market is being dominated by the political agendas of the United States and Japan.
Although U.S. economic data still shows resilience, political risk is becoming the core driver of the dollar's weakness; on the Japanese side, despite facing global risk aversion, the yen has failed to play its traditional "safe haven" role and has instead been sold off due to expectations of aggressive domestic fiscal policies.
Trump Launches "Greenland Tariff" to Hit the Dollar Hard
The Nomura report points out that Trump's hardline stance on the acquisition of Greenland has triggered a new round of trade conflict between the U.S. and Europe. Trump announced that if European countries do not cooperate with his decision regarding Greenland, he will impose additional tariffs on eight European countries starting February 1.
According to CCTV News, U.S. President Trump recently stated that he would impose a 10% tariff on eight European countries that oppose his acquisition of Greenland, which will increase to 25% after several months until an agreement is reached on the "complete and total purchase of Greenland."
This geopolitical tension directly impacted market risk sentiment earlier this week. While U.S. stocks fell, the dollar did not rise as it usually does in times of risk aversion, but instead weakened broadly against G10 currencies. Nomura analysts noted that this market reaction is reminiscent of the "Liberation Day" on April 2025.
This signals a clear message to investors: "Despite recent U.S. data showing resilience, political risks may weaken the dollar this year." The dollar index is expected to plunge about 9.5% throughout 2025.
Takaichi Sanae's "Surprising" Tax Cuts Pressure the Yen
Against the backdrop of a weakening dollar, the yen has not shown significant strength among G10 currencies, instead, the exchange rate has fallen below the 158 level, approaching the critical 160 mark. Nomura attributes this mainly to domestic political factors in Japan, particularly Prime Minister Sanae Takaichi's policy shift.
According to Xinhua News, Japanese Prime Minister Sanae Takaichi stated at a press conference on January 19 that she would dissolve the House of Representatives on January 23 and seek voter authorization to continue governing, with the House of Representatives election scheduled for February 8. The current term of the members of the House of Representatives was originally set to expire in October 2028 Although the election itself has been priced in by the market, her proposed economic agenda has surprised the market.
"She confirmed plans to temporarily reduce the food consumption tax for two years, which surprised the market."
Nomura emphasized that Takemoto Sanae had a negative view on tax cuts during last year's Liberal Democratic Party presidential election, believing that tax cuts would not have an immediate effect. However, in order to win the upcoming House of Representatives election, this policy seems to have become a core measure of her "responsible and proactive fiscal policy" platform.
Given that the main Japanese opposition party (Centrist Reform Alliance) has also proposed permanently abolishing the food consumption tax, it seems that both sides of the Japanese political arena are competing to include tax cuts in their campaign agendas.
The sell-off of Japanese bonds exacerbates yen weakness
This shift towards tax reduction policies has directly triggered market concerns about the deterioration of Japan's fiscal situation. Nomura pointed out that this is an important factor leading to the sell-off of Japanese government bonds (JGB) and dragging down the yen.
Data shows that the yield curve of Japanese government bonds exhibited a "bear steepening" trend on January 19, with the 10-year Japanese government bond yield rising to 2.270%.
Nomura warned investors that considering there are multiple long-term and ultra-long-term bond auctions during the campaign period, including tomorrow's 20-year government bond auction, the sharp fluctuations in long-term rates could further increase the depreciation pressure on the yen, just like last year.
Despite market concerns about fiscal discipline, Takemoto Sanae's political gamble seems to have paid off at the ballot box.
According to an early poll conducted by Asahi Shimbun from January 17 to 18, the ruling coalition formed by the Liberal Democratic Party and the Japan Innovation Party (LDP-JIP) has an advantage over the main opposition party. 69% of respondents believe that the new opposition party, the Centrist Reform Alliance, cannot become a strong opponent to the ruling coalition.
Nomura concluded that, based solely on this result, Takemoto Sanae's coalition is likely to secure a majority of seats in the upcoming election. However, analysts also remind investors: "The survey results should not be over-interpreted, as the electoral situation can change easily."
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