{"id":37313,"date":"2013-04-05T10:37:24","date_gmt":"2013-04-05T14:37:24","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37313"},"modified":"2013-04-05T10:37:24","modified_gmt":"2013-04-05T14:37:24","slug":"whats-next-for-the-yen-and-japanese-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/05\/whats-next-for-the-yen-and-japanese-stocks\/","title":{"rendered":"What\u2019s Next for the Yen and Japanese Stocks?"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

When it comes to quantitative easing, Fed Chairman Ben Bernanke is playing AA minor league ball at best.\u00a0 If he ever wants to make the big leagues, he needs to take batting practice with Japan\u2019s new central bank governor, Haruhiko Kuroda.<\/p>\n

In addition to the \u201cusual\u201d quantitative easing actions of buying government bonds, the Bank of Japan will be buying 30 billion yen of Japanese real estate investment trusts and a trillion yen of exchange traded funds\u2026annually!<\/p>\n

By Forbes estimates<\/a>, the new expansion in Japan\u2019s monetary base amounts to 10% of Japan\u2019s GDP.\u00a0 By comparison, Bernanke\u2019s QE Infinity is less than 7% of U.S. GDP.<\/p>\n

Not surprisingly, Japanese stocks surged on the news.\u00a0 We talk about the Fed \u201cpropping up\u201d the stock market here (and conspiracy theorists have long accused the \u201cPlunge Protection Team<\/a>\u201d of manipulating the markets), but\u00a0 we\u2019ve never had the Fed directly jumping into the stock market like this.<\/p>\n

What does this mean for Japanese stocks going forward?\u00a0 Or the yen?<\/p>\n

\"Figure<\/a><\/p>\n

Figure 1: USDJPY<\/p>\n<\/div>\n

The standard \u201cdon\u2019t fight the Fed\u201d advice applies here, at least in the short term.\u00a0 The Bank of Japan is determined to push the value of the yen down to boost exports and to shake the economy out of its long deflationary funk.\u00a0 It\u2019s much easier for a central bank to destroy the value of its currency when it is expensive than to prop up its value when it is falling.<\/p>\n

So, don\u2019t try to be a hero here by betting against the Bank of Japan.\u00a0 Remember, George Soros made his legendary \u201cbankrupt the Bank of England\u201d trade by shorting<\/i> the pound when the BoE was trying to prop it up.\u00a0 Not even Soros the Great and Powerful could have succeeded in a long bet against a central bank this determined to weaken its currency.<\/p>\n

Let\u2019s take a look at how the yen has performed of late (Figure 1<\/strong>). You have to view this graph in reverse; a rising line means a falling yen relative to the dollar. (Think of it like this; back in November, a dollar would have bought you 80 yen; that same dollar today will buy you 96 yen.)<\/p>\n

The yen has been in virtual free fall since it became obvious that Prime Minister Shinzo Abe would win last year\u2019s election, though the yen rose sharply for most of March due in large part to the turmoil coming out of Europe.<\/p>\n

Perversely, given Japan\u2019s debt load, the yen became a \u201chaven\u201d currency following the unwinding of the carry trade in 2008 (which should put the nail in the coffin of any ideas you might have had about markets being rational).\u00a0 So, if Europe has another destabilizing wave of volatility, then the yen might enjoy a brief respite.\u00a0 But overall, the yen\u2019s downward trend will likely continue for a while.<\/p>\n

\"Figure<\/a><\/p>\n

Figure 2: iShares MSCI Japan ETF (NYSE:EWJ)<\/p>\n<\/div>\n

What about Japanese equities?<\/p>\n

Japanese stocks, measured by the iShares MSCI Japan ETF (NYSE:$<\/span>EWJ<\/a>)<\/strong>, have been on a tear since mid-November (Figure 2<\/strong>), coinciding with the yen\u2019s decline.\u00a0 And over the next, say, three to six months, I expect this trend to continue.<\/p>\n

But be careful here; Japanese stocks should be viewed as a short-term trade, and most definitely not a long-term investment.\u00a0 In the not-too-distant future, I expect Japan to bust apart at the seams.\u00a0 If the Bank of Japan is successful in reigniting inflation, Japanese bond yields will rise.\u00a0 And when Japan\u2019s financing costs rise, that gargantuan pile of debt (currently 220% of GDP) becomes a lot harder to service.<\/p>\n

As I wrote in February<\/a>, \u201c<\/i>debt service now accounts for 43% of Japanese government revenues and quarter of all spending.\u00a0 Furthermore, more than half of all Japanese government spending is financed by new borrowing.\u00a0 \u00a0This means that half of every yen borrowed is used to service existing debts.\u00a0 It\u2019s a debtor\u2019s nightmare that gets worse every year with budget deficits that are consistently higher than 7% of GDP.\u201d<\/i><\/p>\n

The bond vigilantes will eventually wake up and take note of these sobering statistics, and when they do things are likely to deteriorate very quickly.\u00a0 Think banana republic levels of hyperinflation followed by outright default.<\/p>\n

Amazingly, Japanese yields continue to fall for now.\u00a0 The 10-year Japanese bond now yields an almost unbelievable 0.45%<\/a>.\u00a0 At these levels, shorting Japanese bonds becomes an almost risk-free proposition.<\/p>\n

When yields finally begin to rise, get ready for the short opportunity of a lifetime in virtually all Japanese assets.\u00a0 In the meantime, keep an eye on the 10-year yield.\u00a0 When it rises above the 1.0-1.5% level, I expect doomsday to follow shortly thereafter.<\/p>\n

Disclaimer: Charles Sizemore currently has no positions in any security mentioned.<\/p>\n

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The post What’s Next for the Yen and Japanese Stocks?<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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