JAPAN’S JUGULAR 2.0: WILL 2012 BE THE BEGINNING OF THE END?

***It has come to our attention that the hyperlink in Tuesday's note did not successfully download the accompanying presentation for everyone. As such, we're re-sending the link to the deck; please email us if the updated link below still fails to work and we'll be happy to get you the PDF file.***


CLICK HERE TO DOWNLOAD THE CORRESPONDING SLIDE DECK: http://docs.hedgeye.com/Japans%20Jugular.pdf


Conclusion: The perception of the Japanese sovereign debt market is at risk of a fundamental inflection point in 2012, as heavy issuance is likely to be accompanied by very public failures in passing much-needed fiscal reform. As such, we will seek to manage immediate-term risk within this long-term bearish thesis by trading Japanese equities and the Japanese yen with a bearish bias.

  

Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).

 

“I skate to where the puck is going to be, not where it has been.”

-Wayne Gretzky

 

For long-time Hedgeye clients, our long-term bearish outlook for Japanese economic growth is not new news; neither is our aggressive stance against their ultra-Keynesian monetary policy and fiscal positioning. That said, however, 2012 shapes up to be a rather interesting year for Japan’s sovereign debt market, as both a heavy auction calendar coincides with debates on key fiscal reforms – both of which possess the potential of dramatically surprising consensus expectations to the downside.

 

Given our own deep understanding of the tailwinds supporting the Japanese yen and the Japanese government bond market, it would be reckless to assign a timeline to a potential Japanese sovereign debt and/or banking crisis. We have, however, done the work and are comfortable in saying that, more so than any year prior, 2012 shapes up to be the year where confidence in the JGB market is lost – putting Japan at risk of being next in line to face the music of ourSovereign Debt Dichotomy theme.

 

As the aforementioned quote by hockey great Wayne Gretzky suggests, we think it’s appropriate for investors to begin hedging their portfolios against Japanese sovereign credit risk. As always, feel free to email us at if you have any follow-up questions and would like to dialogue further.

 

Darius Dale

Senior Analyst


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