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Is the Short Yen / Long Japanese Equities Trade Over?

Is the Short Yen / Long Japanese Equities Trade Over?

By Expert Panel 27.05.2013


In volatility we haven’t seen since the Fukushima disaster, Japanese shares dropped by 7% on Thursday before bouncing off of those lows later in the day.  Ouch!

The ostensible cause?  Fed Chairman Ben Bernanke indicated that QE Infinity might—just might—come to end if U.S. economic data improve, and China’s PMI came in lower than expected.  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.

Japanese stocks were definitely due for a breather; the Nikkei had been up by more than 50% year to date.  But does Thursday’s action point to something bigger?  Could it be that the short yen / long Japanese equities trade is over?

We’ll 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.

The real trading opportunity here, however, is in Japanese bonds.  This is a trade where the risk and potential reward are asymmetric; your downside is modest while your upside is enormous.

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

Could yields retest those old lows? Of course, anything is possible.  But given the scale of the money printing involved, I wouldn’t bet on it.

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.  Japan’s 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.  Given that Japan is no longer a high-savings-rate country, they cannot depend on their citizens to bail them out this time.  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…which would almost certainly cause yields on Japan’s debt to soar.

To take advantage of this, investors may opt to short Japanese debt.  The easiest way to do this is via the Powershares DB 3x Inverse Jap Gov Bond ETN ($JGBD).  Be careful here because this is a leveraged ETN that also happens to be somewhat thinly traded.

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

Disclosures: Sizemore Capital is long JGBD. 

Charles Lewis Sizemore, CFA is the founder and editor of The Sizemore Investment Letter, a monthly newsletter dedicated to finding superior investments backed by powerful macro trends. He also serves as the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor.

 

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6. Identifying Market Trends: Learning how to identify the trend should be...

7. Is the Short Yen / Long Japanese Equities Trade Over?: The Nikkei had been up by more than 50% year to...

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9. Stocks on a roll: ASX rolling 52-week highs for the previous...

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WHAT’S ON THIS WEEK

week 28 November 2014
    • 24
    • BHP BHP Billiton briefing on its coal and copper businesses | 8:49 AM
    • Deloitte/Financial Services Council lunch David Murray, chair of the Financial System Inquiry, speaking at a Deloitte/Financial Services Council lunch | 8:50 AM
    • 25
    • AllianceBernstein economist Guy Bruten Briefing on Australian economy in 2015 by AllianceBernstein economist Guy Bruten | 4:23 AM
    • AOFM Australian Office of Financial Management (AOFM) to issue $200 million of February 21, 2022 Treasury Indexed Bonds | 4:25 AM
    • Australian British Chamber of Commerce lunch Helen Conway, director of Workplace Gender Equality Agency, speaking at Australian British Chamber of Commerce lunch | 5:42 AM
    • CEDA CEDA workplace flexibility event featuring PwC managing partner Gavin Moss | 6:46 AM
    • RBA Speech by Reserve Bank of Australia deputy governor Philip Lowe to the annual Australian Business Economists conference dinner | 8:48 AM
    • HVN Harvey Norman annual general meeting | 8:48 AM
    • MPL Medibank Private shares to begin trading on ASX | 8:48 AM
    • ALL Aristocrat Leisure full year results | 8:49 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 8:49 AM
    • BKN Brickworks annual general meeting | 8:50 AM
    • MSB Mesoblast annual general meeting | 8:51 AM
    • RFG Retail Food Group annual general meeting | 8:51 AM
    • 26
    • AOFM AOFM to issue $700 million of April 21, 2024 Treasury Bonds | 2:19 AM
    • ABS Australian Bureau of Statistics construction work done for September quarter | 4:25 AM
    • HIA Housing Industry Association/Commonwealth Bank affordability report for the September quarter | 4:27 AM
    • CAB Cabcharge annual general meeting | 5:22 AM
    • WEB Webjet annual general meeting | 5:22 AM
    • SUN Suncorp chief executive Patrick Snowball speaking at Australian British Chamber of Commerce lunch | 5:22 AM
    • AVG Australian Vintage annual general meeting | 6:08 AM
    • REX Regional Express annual general meeting | 6:09 AM
    • 27
    • AOFM AOFM to issue $500 million of Treasury Notes maturing on Febrary 27,2015 | 4:05 AM
    • ABS ABS private new capital expenditure and expected expenditure for the September quarter | 4:24 AM
    • HIA HIA new home sales for October | 4:27 AM
    • WOW Woolworths annual general meeting | 4:28 AM
    • CBA Commonwealth Bank business sales indicator for October | 4:28 AM
    • BOQ Bank of Queensland annual general meeting | 5:20 AM
    • SEK SEEK annual general meeting | 5:21 AM
    • MYX Mayne Pharma Group annual general meeting | 5:23 AM
    • BPT Beach Energy annual general meeting | 5:23 AM
    • FeTech magnetite and iron ore conference FeTech magnetite and iron ore conference | 5:41 AM
    • 28
    • RBA RBA to release financial aggregates for October | 4:26 AM
    • LYC Lynas Corp annual general meeting | 4:27 AM
    • MEL Metgasco annual general meeting | 4:28 AM
    • PRY Primary Health Care annual general meeting | 4:28 AM
    • RRL Regis Resources annual general meeting | 4:29 AM
    • AHF Australian Dairy Farms annual general meeting | 6:07 AM
    • AOFM AOFM to issue $500 million of October 21, 2019 Treasury Bonds | 6:09 AM
    • FeTech magnetite and iron ore conference FeTech magnetite and iron ore conference | 6:09 AM

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