Ad Hoc Commentary – a crisis in Japan, but beware buying USDJPY with abandon
During times of crisis, duration of reign of Roman Emperors shortened
Since Shinzo Abe in 2006, Japan had a string of Prime Ministers that
lasted only 12 months or so:
Fukushima 3/11 changed everything. It put the “one prime minister a
year” model to test, and probably left society seeking for stronger
leadership. Japan is worse than Greece on a gross debt to GDP ratio
but she defied critics through the unity of the Japanese people. If
Europe were as united as Japan, we probably will not have any
sovereign debt crisis today.
Fukushima 3/11 shook the confidence of the Japanese people in their
leaders. The latest political bickering over tax or monetization will
likely lead to more confidence loss. However, the currency will only
do the final capitulation only when confidence is totally lost. We had
seen that happening recently in the EUR (the EURUSD did not go to
parity despite all the doom and gloom), and it happened before in the
distant past with the Sterling. When countries are in a sovereign debt
crisis, the currency will trade in a range before the final
In a debt crisis, there are two ways to handle the debt burden without
outright defaulting – tax or monetize. Less than a week ago, Japan,
like Europe and America, was clearly on the path of taxation. The
planned rise in goods and services tax was a step in that direction.
However, politicians pandered and promoted monetization as the silver
bullet. Democracies have a tendency to fail us during times of
economic crisis. What the country really needs is political
Japanese corporates are familiar with political meddling. They ran
back to Japan when the G5 Plaza Accord devalued their American assets
by 50% in 1985-1987, culminating in a 1989 Heisei bubble. It was
nationalistic not to sell the falling Nikkei thus giving us a drawn
out market correction as opposed to a sharp correction. In this phase,
capital will likely flee Japan if the opposition gets their way to
monetization by replacing current BOJ Governor, Shirawaka-san, with a
helicopter dove. This will bolster our case for massive FDI into Asia
in 2013 not just on American money, but on Japanese money too. Yours
truly like Indonesia and India in particular.
Even though we correctly called that USDJPY had hit bottom since it
took 76.05 earlier this year, long USDJPY is NOT a sure trade. The
time is not at hand yet for Japan, as it was not for Europe. If you
made truckloads trading EURUSD in the past three years, then you would
probably do well range trading the USDJPY as you did EURUSD. If like
most, you find EURUSD no different than flipping the coin, then you
will likely find USDJPY similar. In my humble opinion, it is far
easier to be bullish currencies that will be the capital flight
destinations. The hated Indian rupees or Indonesian rupiah will likely
shine next year on FDI inflows.
Yours truly maintained his general bearishness in his last note.
The crisis in Japan embarrassed him somewhat in the past few days as
money fled from Japan into stock markets everywhere. However, am
staying steadfast with the bears till year end, and will likely turn
bullish only in January.
Good luck in the markets.