Friday, January 27, 2012

Our view on Japan

The Yen has been on a tear after the financial crisis, but also long-term since 1971: from Y357.41 to the dollar in August 1971 to Y75.31 on Oct. 31, 2011. The WSJ reports today (The Yen’s 40-Year Win Streak May Be Ending), some traders think that we are at an inflection point.

Now Japan's fundamentals are abysmal to put it mildly:
  • An aging and shrinking population
  • 200%+ Debt/GDP 
  • A shrinking savings rate that has turned negative
  • Debt service greater than tax collections
  • A trade deficit for the first time in decades
Kyle Bass has famously argued that Japan is staring into the abyss and 10y JGB rates have no where to go but up. This trade has been a widow-maker in the past, but we also believe that the tide is starting to turn. Given rock-bottom Japanese rates and some of the cheapest equity valuations in the world, we believe that high inflation will be excellent for Japanese equities. As such, we have opened a position in the WisdomTree Japan Hedged Equity Fund (DXJ) ETF to benefit from a. Reallocation of domestic money flows to Japanese equities from pensions, life insurers and individual investors b. Weakening Japanese Yen c. Valuation catch-up as a falling currency acts as a tailwind for export-oriented companies

[Disclaimer: this does not under any circumstance constitute investment advise. We are not Registered Investmet Advisors, and all investors need to perform their own due diligence]

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