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Is Abenomics Going to Put Japan Back on the Map?
Posted By John Mauldin On May 9, 2013 @ 8:00 am In Think Tank | Comments Disabled
Is Abenomics Going to Put Japan Back on the Map?
May 8, 2013
In a special Outside the Box today, Keith Fitz-Gerald, Chief Investment Strategist for Money Morning, dissects “Abenomics,” the radical, not to say outlandish, fiscal moves that the newly installed government of Japan is making. And Keith has a ringside seat: he spends much of each year in Japan.
In an attempt to cut the Japanese a little slack, Keith comes up with four things that will have to happen for Abenomics to work – but when all is said and done, he says, Abenomics is a recipe for disaster. That does not mean, however, that there is not plenty of opportunity here for short-term profit, and Keith offers a play that is a potential money maker in this volatile Japanese environment.
For a limited time, Outside the Box readers can receive a 60% discount when they subscribe to Keith’s Money Map Report. You can check it out here .
Have a great week.Your up to my eyeballs in information analyst,
John Mauldin, Editor
Outside the Box
By Keith Fitz-Gerald
On the surface, Abenomics – the radical unlimited stimulus plan put in place by newly elected Japanese PM Shinzo Abe – appears to be working.
The Nikkei is up 68% since July, 2012, the yen has weakened by 26% over the same time frame, and Japanese consumer confidence is up sharply to the highest levels in six years.
The theory behind Abenomics is that the rising stock market will create capital, and the falling yen will make Japan’s export-based economy more competitive in global markets, while newly profitable companies will hire more workers.
Don’t hold your breath.
As I noted during a recent interview on NHK, Japan’s national public broadcasting network, the beleaguered island nation faces significant challenges:
The bottom line?
Japan is making the same mistakes we’re making … or we’re making the same mistakes they’ve already made – it’s hard to tell.
Either way, the bottom line is pretty simple: You give me a trillion yen and I’ll give you a good time, too.
In order for Abenomics to work, four things have to happen:
Longer-term, Abenomics is a recipe for disaster – have no illusions about that. Japan, as John Mauldin likes to say, is a bug in search of a windshield. No nation in the history of mankind has ever bailed itself out on anything more than a short-term basis by pursuing a course like Japan’s.
But short-term … that’s another matter entirely, and therein lies opportunity.
Historically, every 10% drop in the yen versus the dollar has translated to a 0.3% rise in Japanese GDP the following year, noted Kiichi Murashima, chief economist at Citi in an FT interview.
You cannot say the same thing about Japanese stocks.
Since the Japanese market’s initially collapse in 1991, the world has watched with bated breath as the Nikkei has risen … and plunged with alarming regularity.
If you’re going to buy and sell like a trader and you’re nimble, you can ride the Japanese equity bull – pun absolutely intended. Most investors aren’t so equipped, though, -and so the “buy and hope” approach they favor is far more likely to leave them disappointed than profitable.
Japanese bonds are probably of dubious value, too. So far they’ve been stable, because Japan has been able to issue mountains of debt to its own dutiful citizens. The cost of debt service has been negligible, because nearly all of it was held domestically.
Now, however, Japan has got a very different situation on its hands. Any rise in long-term rates, let alone a significant one like Kuroda is planning, is going to dramatically hike the cost of debt service to unsustainable levels. Factor in Japan’s rapidly aging population and dwindling workforce, and you’re looking at a far smaller pool of bond buyers.
My expectation is that Japan will be forced into international bond markets no later than 2015, which will effectively double their capital costs. Without meaningful social security reform and spending cuts, that’s going to really impact things.
That’s why I’d rather short the Japanese yen.
Stocks are fickle. Abe doesn’t care whether they go up or down. Bonds are a part of Kuroda’s repurchasing agenda, so those are covered, too. But the yen stands on its own.
In that sense, it’s the key to the proverbial castle.
In order to conduct any sort of serious financial reform, Abe is going to have to move the yen’s needle. Everything in corporate Japan depends on it.
Since I first brought this trade to everybody’s attention in Money Morning in February, 2012, the yen has dropped by 30%, and the investment vehicle I recommended, the ProShares UltraShort Yen Fund, is up more than 60% as it flirts with the psychologically important ¥100/$1USD level.
Now, having come close enough to that target for government work, I think the next stop is ¥125 to the dollar, which means that even if you missed the first part of this trade, it’s not too late to get on board.
And if you’re already holding Japanese equities?
Don’t look a gift horse in the mouth.
Hedge the snot out of them or sell into strength – equity markets are not as directly connected to central banking stimulus efforts. But they are absolutely linked to traders’ expectations, which can and do change all too frequently on nothing more than a whim or an errant “tweet,” as we have recently seen.
You don’t want to be left holding the bag.
For a limited time, Outside the Box readers can receive a 60% discount when they subscribe to Keith Fitz-Gerald’s Money Map Report. Check it out here .
About the Author: Keith Fitz-Gerald is a seasoned analyst, expert media contributor, and futurist with decades of experience in global markets. In his capacity as Chief Investment Strategist for Money Morning and Chairman of the Fitz-Gerald Group, he appears regularly on financial television programs around the world on the Fox Business Network, CNBC Asia, NHK, BNN, and more. He’s been called on for his extraordinary ability to see future trends in such publications as Wired UK and the Wall Street Journal. Forbes.com labeled him a “Business Visionary.” Even Mensa has called him to their stage. Mr. Fitz-Gerald splits his time between homes in Oregon and Japan, with his wife and two boys. He travels the world extensively in search of investment opportunities others don’t yet see or recognize.
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