Synopsis:

The selection of President-elect Donald Trump’s Treasury Secretary carries significant implications for the Japanese yen (JPY), with multiple layers of potential impact. Among these, a possible shift in USD policy introduces an upside risk for the JPY, though this remains a fat-tail scenario.

Key Points:

• Tax Policy and UST Yields:

  • The JPY is highly sensitive to UST yields.
  • The nominee's stance on aggressive tax cuts will shape the initial reaction in UST yields, influencing JPY performance.

• Trade Policy Alignment:

  • A nominee closely aligned with Trump’s tariff agenda could weigh on the JPY.
  • Tariffs' inflationary impact would push UST yields higher, exerting downward pressure on the yen.
  • Japan’s substantial trade surplus with the US makes it vulnerable to tariff-related pressures.

• USD Policy Shift:

  • The nominee's stance on USD policy poses a significant longer-term risk.
  • A move from a strong USD policy to a weak USD policy could benefit the JPY, given its undervaluation and historical precedents like the Plaza Accord.
  • This scenario, while impactful, remains a fat-tail risk as a policy shift is unlikely to be announced immediately.

Conclusion:

The Treasury Secretary's selection presents both direct and indirect implications for the JPY, with the most immediate effects stemming from tax and trade policies influencing UST yields. While a shift in USD policy could provide longer-term support for the yen, this remains a less likely outcome in the near term. Market participants should monitor these developments closely for signals impacting JPY positioning.