Moody’s Analytics suggests that the new U.S.-Japan trade deal may have an immediate political impact. Economist Stefan Angrick highlights that it comes just after Prime Minister Ishiba’s ruling coalition lost in the upper house elections. Ishiba likely postponed finalizing the deal until after the elections to keep political unity by framing tariff threats as a national crisis. Now that the risk of tariffs is decreasing, that argument loses its strength.

Potential Leadership Change

If Ishiba resigns, his successor could rethink the trade deal that many see as beneficial to the U.S. Reports say Ishiba plans to step down by the end of August, raising concerns about the future of the agreement. Given the political issues Angrick mentions, derivative traders should get ready for increased volatility in the Japanese market. A potential leadership gap in Japan, the world’s third-largest economy, will create uncertainty that affects asset prices. This situation is ideal for strategies that benefit from price fluctuations rather than a specific direction. We expect the currency market to respond first, specifically the USD/JPY exchange rate. Historically, sudden political changes in Tokyo can lead to sharp movements. For example, when Prime Minister Shinzo Abe announced his resignation on August 28, 2020, the yen experienced significant volatility against the dollar within hours. Traders might want to consider buying options straddles on the yen to profit from major moves in either direction as the market reacts to a new leader. The uncertainty around a possible resignation will also impact Japanese stocks. We forecast that the Nikkei Volatility Index, a key measure of market anxiety, will rise from its recent average of about 17 toward its yearly highs above 20. Purchasing put options on the Nikkei 225 index is a direct way to protect portfolios or bet on a market decline linked to political instability.

Market Implications

The trade deal highlights specific industries, particularly Japanese automakers, who were central to negotiations. Ishiba’s successor might adopt a tougher stance on the deal, posing risks for companies like Toyota and Nissan. We will keep an eye on options volume for these major exporters to look for signs of institutional hedging or bearish bets. With reports indicating a decision on his resignation might come by the end of August, the time to prepare for this event is running out. The best strategy we see is to position for increased volatility, as the new prime minister’s policy direction remains uncertain. The possibility of a successor reevaluating an agreement viewed as favoring the U.S. introduces a layer of trade tension that the market hasn’t yet accounted for. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now