{"id":40275,"date":"2013-07-23T14:54:50","date_gmt":"2013-07-23T18:54:50","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=40275"},"modified":"2013-07-23T14:54:50","modified_gmt":"2013-07-23T18:54:50","slug":"is-the-abe-trade-still-in-play","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/23\/is-the-abe-trade-still-in-play\/","title":{"rendered":"Is the \u2018Abe Trade\u2019 Still in Play?"},"content":{"rendered":"

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

The votes have been counted.\u00a0 Japan\u2019s Liberal Democrats\u2014the party of Prime Minister Shinzo Abe\u2014won a landslide victory over the weekend, securing control of both houses of parliament.<\/p>\n

The implications here are huge.\u00a0 Abe is as close as you can get in modern Japan to a militant nationalist, and the win will only encourage him to escalate his war of words with China.\u00a0 Abe is pushing for a re-write of Japan\u2019s constitution that would scrap some of the pacifist language written in by the United States after Japan\u2019s surrender in World War II.<\/p>\n

All of that is fine and good, but the question on most investors\u2019s minds is far more focused: what does this mean for Abenomics and the \u201cAbe Trade\u201d of going long Japanese equities and short the yen?<\/p>\n

Japanese stocks were mostly flat after the news, suggesting that there were no real surprises.<\/p>\n

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

Looking over the past few months, we get a more interesting story.\u00a0 The Japanese Nikkei Index (orange line above) took a tumble in May and early June, falling into bear market territory.\u00a0 Yet taking a lot of investors by surprise, the Nikkei has since rallied and gained back most of its losses.<\/p>\n

The yen (green line), which has moved the opposite direction, rallied over the period before giving most of the gains back.<\/p>\n

So, it would appear that the Abe Trade is back on\u2026at least for the time being.<\/p>\n

If you are a short-term trader or trend follower, then there may be a little money left to be made in this trade.\u00a0 By all means, go for it. But be careful, and make sure you have some kind of risk management in place.<\/p>\n

If you are a longer-term investor or if you are less-inclined to monitor your positions closely, stay out of Japan.\u00a0 Being long Japan is comparable to picking up nickels in front of the proverbial steam roller.\u00a0 If you linger too long, you will get crushed.<\/p>\n

While I try to stay objective and avoid looking at the markets through biased eyes, I admit fully that I have become something of a Japan permabear<\/a>.\u00a0 When I look at the country\u2019s macro environment, I do not see any set of circumstances whereby this doesn\u2019t end poorly.\u00a0 At 240% of GDP, Japan\u2019s sovereign debts are the highest in the developed world, and by a wide margin.\u00a0 Its population is aging and shrinking (see Jeff Reeves\u2019 recent article about the Japanese boom in adult diaper sales<\/a><\/strong>) meaning its tax base to support its debts gets smaller every year.\u00a0 And it adds to this mountain of debt with a budget deficit of nearly 10% of GDP.<\/p>\n

All it would take for Japan to descend into a financial meltdown would be for its bond yields to rise by a couple percentage points\u2026which is a virtual inevitability given the country\u2019s borrowing needs.<\/p>\n

And topping it off, after their torrid run, Japanese shares are no longer cheap.\u00a0 The Nikkei trades for 16 times expected 2014 earnings.<\/p>\n

When will Japan\u2019s day of reckoning come?\u00a0 Frankly, I have no idea.\u00a0 It will come when investor sentiment shifts and investors suddenly perceive the risk that has been there all along.\u00a0 It could happen tomorrow\u2026or it could happen in a few years\u2019 time.\u00a0 But happen it will.<\/p>\n

If you want to continue to play the Abe trade, the second half\u2014shorting the yen\u2014is the less risky option.\u00a0 If I am correct about Japan eventually blowing up, then the yen will fall to zero\u2026or close to it.<\/p>\n

If you decide to play the first half\u2014going long Japanese equities\u2014do so with the mentality of a short-term trader and use proper risk management.\u00a0 Japan is not a long-term buy because Japan has no long-term future.\u00a0 If you need a reminder, print off Jeff\u2019s article on Japanese adult diapers and tape it to your wall.<\/p>\n

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

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