A Trump Victory Could Revive the ‘BoJ Trade’: JPMorgan

Investing.com — Analysts from J.P. Morgan suggest that a possible victory by Donald Trump in the 2024 U.S. presidential election could rekindle investor interest in the “BoJ trade.”

This strategy involves investing in Japanese equities and banks while simultaneously shorting the yen and Japanese government bonds (JGBs). It gained popularity after the Bank of Japan’s (BoJ) policies created a favorable environment for inflation and economic growth.

The “BoJ trade” thrived due to persistently negative real interest rates and a weakening yen, which heightened inflation expectations in Japan. These conditions prompted market participants to invest in Japanese assets, particularly equities and banks, while shorting the yen and JGBs.

However, recent shifts in market sentiment led to the unwinding of this trade, sparked by fears of a U.S. recession following the July jobs report. This report heightened expectations for aggressive rate cuts by the Federal Reserve, undermining the inflation narrative in Japan and causing a notable retreat from the “BoJ trade.”

According to J.P. Morgan, the unwinding of the “BoJ trade” since early August has been substantial in the futures market. Approximately one-fifth of long positions in Nikkei futures and one-third of short positions in yen futures have been closed. While there are early signs of stabilization in this unwinding, the report indicates that these signs are only tentative at this stage.

The report suggests that a further alleviation of U.S. recession concerns and the resolution of election-related uncertainties may be necessary to halt the unwinding of the “BoJ trade.” Next week’s U.S. payroll report is anticipated to be crucial in assessing U.S. recession risks.

Looking ahead, J.P. Morgan strategists believe that a Trump win could reverse the current market trend. His policies, which are often associated with inflationary pressures, could lessen the likelihood of aggressive rate cuts by the Federal Reserve, potentially reigniting interest in the “BoJ trade.”