Has Japan just gone over its own cliff?

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Has Japan just gone over its own cliff?

Some believe Japan has just entered a full scale crisis and its not priced into markets. Their Balance of Trade is running at minus ten trillion Yen (US$100bln) and the resurgence of Chinese nationalism over the Senkaku islands could see trade deteriorate further and another 1 1/2 or 2% of GDP added to the deficit. GDP, by the way, is running at minus 3 1/2% to minus 4% in Japan (that forecast post-Tsunami-recovery in economic activity never eventuated dear economic experts!). Averting a full crisis may now be impossible and full current account negativity (deficit) is likely (It has already fallen from a US$210bln surplus in 2007 to US$120bln in 2011 and Credit Suisse were forecasting a seasonally adjusted surplus of just Y206bln in October.

Kyle Bass – the man who made billions trading CDS on CDO on subprime mortgages and then made billions more on the 90% erosion of value in Greek bonds – has had the spotlight firmly on Japan for two years. But he now says that Japan has entered the final “checkmate” phase of the game and they have no choice but to change the way they deal with their currency (expect weakening) in the next 12 to 18 months. The BoJ appears reluctant to beat the stubborn strength in the Yen – which has gained 50% against the US dollar in the last five years and makes exports less competitive and the balance of trade worse.

So will Kyle Bass make several billion more on this trade? Time will tell and his track record suggests you should be looking at what the impact of this ‘surprise’ could be on market volatility, the Australian economy and your portfolio. IN the US companies like Tiffany’s. Coach, Prudential and Metlife have significant exposure to Japan.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. michael west
    :

    The market hates surprises. But this problem of deficit financing in Japan is well known to market participants and is of the “slow burn” variety. I believe that the ordinary investor who has no direct exposure to Japan has nothing to worry about. Obviously the Japanese government cannot be expected to finance its deficit by selling low interest bonds to its own people indefinitely and a tipping point must surely come sooner rather than later. But I doubt that this could become a “Lehman moment” or even a Greek tragedy and I think you need to be an economist specialising in Japanese financial markets to really know.

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