Conclusion: The Japanese yen carries a great deal of asymmetric downside risk over the long-term TAIL. This view is supported by the combination of incrementally aggressive inflation targeting and accelerating sovereign debt risk.
Position: Short the Japanese Yen via the ETF: FXY
This morning, Keith used this morning’s short-term pop in the Japanese yen to short the currency via the ETF FXY, which tracks the USD/JPY pair in lockstep across multiple durations. As we have seen in recent years, that cross continues to be dominated largely by the spread between short-term interest rate expectations emanating from Federal Reserve and Bank of Japan monetary policy.
Longer term, we think the yen will come under increased selling pressure as the Bank of Japan looks to meaningfully step up its pursuit of inflation, which would serve to erode the real yield advantage of holding Japanese fixed-income assets – including JGBs, which are an asset we have flagged in recent weeks for its heightening risk profile.
For more details behind these conclusions, refer to our Triangulating Asia note from MAR 5 and our DEBT, DEFICIT & DEMOGRAPHIC RECKONING presentation from MAR 2:
- To access the replay podcast, please copy/paste the following link into the URL of your browser: https://app.hedgeye.com/feed_items/18779-japan-s-debt-deficit-and-demographic-reckoning
- To access the accompanying slide deck, please click on the following link (try copying/pasting if clicking it does not work): http://docs.hedgeye.com/Japan2012.pdf
Our quantitative risk management levels on the yen are included in the chart below.