Trump's Victory Spurs Dollar, BOJ to Raise Interest Rates as Remedy

A U.S. dollar rally following Republican Donald Trump's presidential victory could increase pressure on the Bank of Japan (BOJ) to consider raising interest rates by December to prevent the yen from sliding toward three-decade lows. Trump's win has spurred the dollar upward, driven by expectations for tax cuts and tariffs on imports, fueling both economic growth optimism and concerns over inflation.

The dollar’s recent strength pushed the yen to a three-month low of 154.71, far from its high of 140.62 in mid-September. While a weaker yen benefits Japanese exports, it’s also a growing challenge for Japanese policymakers as it raises fuel and food import costs, impacting consumer spending.

Rising inflation was cited as a significant factor behind the voter shift against Japan's ruling coalition in last month's election. Japan's top currency diplomat Atsushi Mimura has intensified warnings against sharp yen declines, indicating the authorities’ readiness to counteract "excessive" currency movements.

A further drop in the yen could lead to a "nightmare scenario" for policymakers, potentially pushing it toward the three-decade low near 162 reached in July, a move that previously led the BOJ to raise interest rates to 0.25% on July 31. During that time, the yen's decline prompted ruling party lawmakers to call for rate hikes or more explicit BOJ communication on interest rate strategies.

Prime Minister Shigeru Ishiba surprised markets on October 2 by stating the economy wasn't ready for additional rate hikes, though he later clarified that he wouldn’t intervene in BOJ policy. However, according to Tsuyoshi Ueno, senior economist at NLI Research Institute, even policymakers who favor caution may support rate hikes if the yen weakens further, potentially prompting the BOJ toward a path of steady rate increases.