{"id":38533,"date":"2013-05-24T09:54:46","date_gmt":"2013-05-24T13:54:46","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38533"},"modified":"2013-05-24T09:54:46","modified_gmt":"2013-05-24T13:54:46","slug":"is-the-short-yen-long-japanese-equities-trade-over","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/05\/24\/is-the-short-yen-long-japanese-equities-trade-over\/","title":{"rendered":"Is the Short Yen \/ Long Japanese Equities Trade Over?"},"content":{"rendered":"

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

In volatility we haven\u2019t seen since the Fukushima disaster, Japanese shares dropped by 7% on Thursday before bouncing off of those lows later in the day.\u00a0 Ouch!<\/p>\n

The ostensible cause?\u00a0 Fed Chairman Ben Bernanke indicated that QE Infinity might\u2014just might\u2014come to end if U.S. economic data improve, and China\u2019s PMI came in lower than expected.\u00a0 A more likely explanation is the recent surge in Japanese government bond yields; the 10-year yield briefly jumped above 1% before falling back into the 80-basis-range.<\/p>\n

Japanese stocks were definitely due for a breather; the Nikkei had was up by more than 50% year to date.\u00a0 But does Thursday\u2019s action point to something bigger?\u00a0 Could it be that the short yen \/ long Japanese equities trade is over?<\/p>\n

We\u2019ll see. I expect that the yen still has much further to fall, and this may or may not mean a short-term rally in Japanese equities.<\/p>\n

The real trading opportunity here, however, is in Japanese bonds.\u00a0<\/strong> This is a trade where the risk and potential reward are asymmetric; your downside is modest while your upside is enormous.<\/p>\n

Japanese 10-year yields cannot go much lower than current levels.\u00a0 At time of writing, the yield was 0.86%.\u00a0 The all-time low was hit last month at just under 0.50%.<\/p>\n

Could yields retest those old lows? Of course, anything is possible.\u00a0 But given the scale of the money printing involved, I wouldn\u2019t bet on it.<\/p>\n

A far more likely outcome is something akin to the Eurozone crisis whereby the bond vigilantes mercilessly punished the countries with high budget deficits and debt loads.\u00a0 Japan\u2019s total debt is roughly 100 percentage points of GDP higher than that of Italy and its yearly budget deficit is substantially bigger, yet it pays a yield that is more than 75% lower.\u00a0 Given that Japan is no longer a high-savings-rate country, they cannot depend on their citizens to bail them out this time.\u00a0 And if the Bank of Japan steps in too aggressively, they run the risk of undermining confidence in the yen and turning its orderly decline into a rout\u2026which would almost certainly cause yields on Japan\u2019s debt to soar.<\/p>\n

To take advantage of this, I recommend investors short Japanese debt.\u00a0 The easiest way to do this is via the Powershares DB 3x Inverse Jap Gov Bond ETN ($<\/span>JGBD<\/a>).<\/b>\u00a0 Be careful here because this is a leveraged ETN that also happens to be somewhat thinly traded.<\/p>\n

Give this trade a little room to run.\u00a0 I would use a stop loss near the old lows $17.50.\u00a0 Your risk here is manageable.\u00a0 If I\u2019m wrong, you have lost roughly 8%.\u00a0 But if I\u2019m right, and the bond vigilantes finally turn on Japan, we might be able to double our money in a matter of weeks or months.<\/p>\n

Disclosures: Sizemore Capital is long JGBD. \u00a0This article first appeared on TraderPlanet<\/a><\/em>.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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