Potential Trump Victory and the “BoJ Trade” Reignition

Investing.com — A potential victory by Donald Trump in the 2024 U.S. presidential election could reignite investor interest in the so-called “BoJ trade,” according to J.P. Morgan analysts.

What is the “BoJ Trade”?

The strategy involves going long on Japanese equities and banks while shorting the yen and Japanese government bonds (JGBs). It gained traction post the Bank of Japan’s (BoJ) policies, which fostered a conducive environment for inflation and economic growth.

The “BoJ trade” thrived on:
– Persistent negative real rates
– A weakening yen

These factors elevated inflation expectations in Japan, prompting market participants to invest in Japanese assets, especially equities and banks, while short positioning on the yen and JGBs was also encouraged.

Recent Trends and Challenges

However, recent unwinding of this trade occurred due to rising U.S. recession fears, particularly after the July jobs report, which amplified expectations of aggressive rate cuts by the Federal Reserve. This shift threatened to strengthen the yen, weakening the Japanese inflation narrative and causing a notable pullback in the “BoJ trade.”

JPMorgan noted, “The unwinding of the ‘BoJ trade’ since the beginning of August has been very significant in the futures space.”

Key Statistics

• Around one-fifth of long positions in Nikkei futures unwound.
• About one-third of short positions in yen futures have been unwound.

While showing “signs of stabilization,” JPMorgan described these signs as “tentative” at best.

Future Outlook

According to JPMorgan, a reduction in U.S. recession concerns and a resolution of election uncertainty may be required to halt the unwinding of the “BoJ trade.” Next week’s U.S. payroll report will be critical in assessing U.S. recession risks.

In the long term, a Trump victory could reverse the current trends. His policies, which tend to create inflationary pressures, may lessen the urgency for the Federal Reserve to implement aggressive rate cuts, potentially reigniting interest in the “BoJ trade.”