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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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WHAT’S ON THIS WEEK

week 31 October 2014
    • 27
    • ARG Argo Investments annual general meeting | 4:26 AM
    • BEN Bendigo and Adelaide Bank annual general meeting | 4:27 AM
    • SPO Spotless annual general meeting | 4:28 AM
    • RBA Panel participation by Reserve Bank of Australia (RBA) head of financial stability, Luci Ellis at the Australian Housing and Urban Research Institute panel roundtable | 6:07 AM
    • 28
    • AOFM AOFM to issue $200 million of February 21, 2022 indexed Treasury bonds | 4:05 AM
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    • Financial Review's Future Forum Financial Review's Future Forum: The Asian Century, featuring Telstra chief financial officer Andrew Penn, Fortescue Metals chief executive Nev Power and former Australian Ambassador to China Geoff Raby | 4:27 AM
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    • BGA Bega Cheese annual general meeting | 5:13 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 5:16 AM
    • DMP Domino's Pizza annual general meeting | 6:08 AM
    • 29
    • MMS McMillan Shakespeare Group annual general meeting | 2:18 AM
    • QRX QRxPharma annual general meeting | 2:18 AM
    • TTS Tatts annual general meeting | 4:06 AM
    • AOFM AOFM to issue $600 million of April 21, 2029 Treasury bonds | 4:59 AM
    • DXS Dexus Property Group annual general meeting | 5:40 AM
    • AGO Atlas Iron annual general meeting | 5:41 AM
    • JBH JB Hi-Fi annual general meeting | 5:42 AM
    • MOC Mortgage Choice annual general meeting | 6:05 AM
    • NIB nib Holdings annual general meeting | 6:08 AM
    • TPI Transpacific Industries annual general meeting | 6:09 AM
    • SUN Suncorp chief executive Patrick Snowball speaking at American Chamber of Commerce in Australia lunch | 6:09 AM
    • GXL Greencross annual general meeting | 6:46 AM
    • 30
    • IAG IAG annual general meeting | 2:19 AM
    • NAB NAB full year results | 4:23 AM
    • AAD Ardent Leisure annual general meeting | 4:24 AM
    • PAS PAS Group annual general meeting | 4:25 AM
    • FDC Federation Centres annual general meeting | 4:25 AM
    • FLT Flight Centre annual general meeting | 4:26 AM
    • PPT Perpetual annual general meeting | 5:13 AM
    • NCK Nick Scali annual general meeting | 5:18 AM
    • HIA HIA New home sales for September | 5:19 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on February 27, 2015 | 5:19 AM
    • FNP Freedom Foods annual general meeting | 5:19 AM
    • TOL Toll Group investor day | 5:35 AM
    • UGL UGL annual general meeting | 5:42 AM
    • ABS Australian Bureau of Statistics (ABS) international trade price indexes for September quarter | 6:05 AM
    • BTT BT Investment Management full year results | 6:06 AM
    • WES Wesfarmers first quarter sales results | 6:10 AM
    • 31
    • ANZ ANZ full year results | 5:20 AM
    • EGP Echo Entertainment annual general meeting | 5:21 AM
    • ABS ABS producer price indexes for September quarter | 5:22 AM
    • RBA RBA to release financial aggregates for September | 5:22 AM
    • NCM Newcrest Mining annual general meeting | 5:22 AM
    • HIL Hills annual general meeting | 5:23 AM
    • AOFM AOFM to issue $600 million of October 21, 2019 Treasury bonds | 5:23 AM
    • MQG Macquarie Group half year results | 6:09 AM
    • ORG Origin Energy quarterly production report | 6:09 AM

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