Japan’s Jugular Continues… Don’t Buy the Hope

Conclusion: Simply put, the broad slowdown within the Japanese economy continues. Don’t buy the hope associated with oncoming yen weakness or hopeful expectations of an economic recovery in the U.S.


Position: Short Japanese equities; Short the Japanese yen.


Per our 4Q10 Macro Themes presentation, the summary of our intermediate-term investment thesis on Japan reads: “Japan’s export-led recovery slows to a halt in 4Q10. GDP could potentially go negative in the next two quarters.”


With the inclusion of Japan’s latest trade data which was released over the weekend, we feel comfortable saying sufficient “progress” towards negative GDP growth in the island economy is being made. Japanese export growth slowed again sequentially in September to the slowest growth since December 2009, coming in at +14.4% YoY. That number was posted against a (-30.6%) “comp” and October 2009 represents the last of the easy “comps” at (-23.3%). The mathematical headwinds get increasingly difficult in November and December of 2009, at (-6.3%) and +12.1% YoY.


Japan’s Jugular Continues… Don’t Buy the Hope - 1


Sell-side analysts and the media alike have gotten the bear case to-date, which is largely driven by the strong yen – which has been trading at or around a 15-year high versus the dollar over the past several weeks. As we have shown in our presentation (email sales@hedgeye.com if you need the replay materials) Japan’s economy is leveraged to manufacturing and exports, which are the key sources for employment and investment within Japan.


As we called out back in August, the strong yen is a major headwind for Japanese exporter’s competiveness and profit margins, which, in turn, are negative for the Japanese economy. Per Japan’s Cabinet Office latest annual survey, Japanese companies remain profitable as long as the yen trades at 92.90 per dollar or weaker in FY11, which began on April 1st for many companies. To date, it has averaged around 88 per dollar, despite recent Japanese Bureaucrat efforts to weaken the yen, which have included Comprehensive Monetary Easing and intervention in the FX market (the latter of which has been marginalized due to increasing global opposition to currency devaluation).


Japan’s Jugular Continues… Don’t Buy the Hope - 2


As we’ve said all along, the #1 factor driving yen appreciation is dollar depreciation, i.e. it isn’t that the yen is going up as much as it is the dollar is going down (down -13% since its June 7 high). What could cause the dollar to reverse its decline over the intermediate term and “alleviate” the stresses on the minds of many Japanese manufacturers? The three factors we see as most likely in our models are: 

  1. Hawkish fiscal rhetoric from a more Republican Congress (see Boehner’s recent comments on spending cuts)
  2. Mean reversion
  3. Widespread reflexive declines in emerging market equities and commodities (triggered by tightening in China and the QE2 announcement “missing” lofty expectations); global loss aversion should increase demand for cash holdings 

Of course, when the yen starts to go down, you’ll get your fair share of lemmings touting Japanese stocks because currency headwinds will shift on the margin to currency tailwinds. Don’t buy the hope. Growth in the U.S. (Japan’s second-largest export market) is setup to slow meaningfully over the next 2-3 quarters and I’m willing to bet the family business that anyone telling you to buy Japanese stocks in the next 3-6 months doesn’t see the Consumption Cannonball coming. Layer on tightening in China (Japan’s largest export market) coupled with rising tensions between the Asian rivals, and it looks increasingly like Japan is running out of bullets over the intermediate term.


Overnight, Japanese Prime Minister Naoto Kan’s Cabinet approved a 5.1 TRILLION yen ($63 billion) stimulus package on top of an additional 1.5 TRILLION yen special account available to the Japan Bank for International Cooperation for overseas investment and infrastructure projects. As the chart below clearly shows, this too won’t matter when it’s all said and done. Again, don’t buy the hope.


Darius Dale



Japan’s Jugular Continues… Don’t Buy the Hope - 3

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more