Geopolitical Uncertainty in Japan and France: Implications for Global Currency and Equity Markets

In 2025, geopolitical realignments in Japan and France are reshaping global currency and equity markets, creating both risks and opportunities for investors. As the U.S.-China strategic competition intensifies and trade protectionism rises, these two nations are recalibrating their economic and foreign policies to navigate a fragmented global order. This analysis examines how Japan’s trade deal with the U.S. and France’s Indo-Pacific strategy are influencing G10 currency dynamics, equity indices, and emerging market (EM) spillovers.

Japan’s Trade Deal: A Yen-Driven Catalyst for G10 Markets

Japan’s landmark trade agreement with the U.S., which reduced tariffs on automobiles and parts from 25% to 15%, has injected stability into its economy. According to J.P. Morgan Global Research, the deal could boost Japanese corporate earnings by 3 percentage points and GDP by 0.3 percentage points year-over-year, increasing the likelihood of a Bank of Japan (BoJ) rate hike in October 2025 [1]. This policy shift has already supported the yen, which appreciated against the dollar following the agreement.

The Nikkei 225, Japan’s benchmark equity index, has shown resilience despite deflationary pressures. A Reuters poll revealed that 75% of Japanese firms view the U.S. trade deal favorably, though 38% expressed concerns about its impact on earnings [3]. Export-driven sectors like automotive and electronics face margin pressures, but domestic reforms, including corporate governance upgrades and shareholder return initiatives, have offset some of these risks [4]. For EM markets, the yen’s strength has triggered a partial unwinding of the yen carry trade, redirecting capital flows and increasing volatility in emerging currencies [6].

France’s Indo-Pacific Strategy: Balancing Sovereignty and Geopolitical Risks

France’s 2025 Indo-Pacific strategy emphasizes sovereignty, multilateral partnerships, and a sharper stance toward China’s assertiveness. By integrating its overseas territories—such as New Caledonia and French Polynesia—into a cohesive security framework, France aims to reinforce its credibility as a “resident power” in the region [2]. This strategy aligns with broader European efforts to counter China’s influence, including Germany’s revised China policy and the UK’s expanded Indo-Pacific engagement.

However, domestic political instability in France poses challenges. A no-confidence vote against Prime Minister Francois Bayrou in September 2025 underscored the fragility of the government, raising concerns about fiscal sustainability [3]. The IMF’s 2025 Article IV consultation warned that high public debt and political fragmentation could undermine France’s ability to implement its Indo-Pacific vision [5]. These uncertainties have contributed to a widening risk premium for Eurozone assets, with the CAC 40 index fluctuating amid mixed investor sentiment [2].

The euro’s performance reflects these tensions. While Germany’s fiscal stimulus and the ECB’s potential pause in its easing cycle have supported the euro, France’s domestic challenges and U.S. trade policy shifts have created headwinds [4]. A weaker dollar, driven by U.S. growth moderation, has partially offset these risks, but the euro remains vulnerable to geopolitical shocks [4].

Cross-Market Correlations and EM Spillovers

The interplay between Japan’s trade policies and France’s geopolitical realignments is amplifying cross-market correlations. For instance, the yen’s appreciation has reduced its traditional negative correlation with EM equities, as capital reallocates to higher-yielding assets in Asia and Southeast Asia [6]. Similarly, the euro’s volatility has heightened sensitivity in EM debt markets, particularly in countries with dollar-denominated liabilities [5].

Emerging markets are also benefiting from a broader shift in global capital flows. As U.S. exceptionalism wanes and the dollar weakens, EM equities—particularly in India and ASEAN—have attracted inflows. J.P. Morgan Research forecasts EM growth at 2.4% in H2 2025, with India’s GDP projected to expand by 6.6% [4]. However, trade barriers and geopolitical tensions, such as U.S. tariffs and Middle East conflicts, remain risks for EM inflation and growth [1].

Investment Risks and Opportunities

For G10 investors, the key risks include:
- Japan: A BoJ rate hike could accelerate yen strength, squeezing export sectors but boosting domestic equities.
- France: Political instability may delay fiscal reforms, increasing Eurozone fragmentation risks.

Opportunities lie in:
- Japan: Undervalued export stocks (e.g., Toyota, Sony) and yen-weakness-driven carry trade rebounds.
- France: Euro strength against the dollar and EM equities as geopolitical realignments stabilize.

For EM markets, the risks of capital outflows and currency depreciation persist, but opportunities exist in sectors aligned with supply chain diversification and energy transition [5]. Investors should prioritize EM economies with strong fiscal positions and geopolitical stability, such as India and Indonesia.

Conclusion

Japan and France are pivotal in shaping 2025’s geopolitical and economic landscape. While their policies offer tailwinds for G10 currencies and equities, they also amplify uncertainties for EM markets. Investors must navigate these dynamics by hedging against currency volatility, favoring EM assets with resilient fundamentals, and monitoring U.S. trade policy shifts. As global alliances evolve, the interplay between G10 and EM markets will remain a critical determinant of portfolio performance.

Source:
[1] US Tariffs: What's the Impact? | J.P. Morgan Global Research, [https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs]
[2] France Refocuses Its Indo-Pacific Strategy Amid a Shifting Global Order [https://thediplomat.com/2025/07/france-refocuses-its-indo-pacific-strategy-amid-a-shifting-global-order/]
[3] Three-quarters of Japan firms view US trade deal favourably, [https://www.reuters.com/business/autos-transportation/three-quarters-japan-firms-view-us-trade-deal-favourably-reuters-poll-shows-2025-08-13/]
[4] 2025 Mid-Year Global Investment Outlook: Ride the policy ... [https://int.media.amundi.com/news/2025-mid-year-global-investment-outlook-ride-the-policy-noise-and-shifts-4d93c-b6afb.html]
[5] France: Staff Concluding Statement of the 2025 Article IV Consultation [https://www.imf.org/en/News/Articles/2025/05/22/CS-France-2025]
[6] The Yen's Strength and Its Impact on the Japanese Stock Market [https://hayinsights.com/the-yens-its-impact-on-japanese-stock-market/]