Takeaway: We're shorting the Japanese yen here as risk heightens across the Japanese economy and Japanese capital markets.



  • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
  • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
  • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.


Overnight, recent BOJ board appointee Takehiro Sato (former Morgan Stanley economist) attempted his best Chuck Evans impersonation by publically stating that the Japanese central bank is ready to ease monetary policy further – just one week after the BOJ increased its Asset Purchase Program by ¥10 trillion to ¥55 trillion (¥5 trillion for purchases of JGBs; another ¥5 trillion for purchases of Japanese Treasury discount bills) and removed its price ceiling/yield floor for JGB purchases! More importantly, he reiterated his call for the board to consider new measures, such as taking on additional balance sheet risk via purchases of riskier securities and/or outright purchases of foreign currency assets.


Sato, a known dove from his days on the sell side, has been a big supporter of altering the BOJ’s mandate to include the purchasing of foreign currency assets, with the explicit goal of devaluing the JPY vs. competitor currencies to promote Japanese exports. It’s worth noting that its +7.1% gain vs. the USD makes the JPY the world’s strongest currency over the last six months. We’ve written extensively on how this is the ultimate fool’s game with respect to the JGB market, as any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade. For our detailed thoughts on this topic, refer to the following notes: ARE JAPANESE GOVERNMENT BONDS POSED TO MAKE SOME NOISE? (7/27) and THE RAMIFICATIONS OF JAPAN’S LOOMING GOVERNMENT SHUTDOWN (8/28).


A new catalyst that looks poised to accelerate yen deprecation over the intermediate term are Shinzo Abe’s recent election to head up the Liberal Democratic Party in Japan, the ruling DPJ’s main opposition group. He’s long been in favor of the BOJ accelerating their balance sheet expansion as they seek to achieve a +3% inflation target, which Abe prefers over the BOJ’s current +1% target. A broader parliamentary election must be called by AUG ’13 at the latest and a Yomiuri newspaper poll published SEP 18 showed 31% of respondents planned to vote for the LDP in the proportional representation section of the next election vs. 14% for the DPJ and 16% for a new party formed by Osaka Mayor Toru Hashimoto – meaning Abe and the LDP could once again reestablish themselves atop the Japanese political hierarchy. As a result, we could see even more pressure placed upon the BOJ to acquiesce to political demands for monetary easing, though to some extent, that is already very much a non-partisan agenda among Japanese bureaucrats.


Another way Abe’s victory contributes to our intermediate-term bear case on the JPY is via the current Sino-Japanese tensions over the Diaoyu-Senkaku islands. Abe has been outspoken in recent years about revising Japan’s pacifist constitution to loosen military restrictions and he also supports building on the islands, which would be a “gross violation of China's territorial integrity and sovereignty" per China’s foreign minister Yang Jiechi. “We want to show our intention to firmly protect the islands and our territorial waters,” Abe said at a post-election press conference. At a bare minimum, Abe’s hawkish stance and rhetoric on the matter is likely to push current Japanese prime minister Yoshiko Noda in that direction as he seeks to strike a chord with the Japanese populace (75% of Japanese voters approve of the government’s intentions to seize and develop the islands). In that vein, Noda stated today that “Japan will never budge” on its ownership over the Senkaku islands.


As we detailed in a research note last week titled, “ARE CHINA AND JAPAN HEADED FOR WAR?”, the economic consequences of escalating tensions between the two countries are both great in magnitude and poised to continue accelerating over the intermediate term. To recap recent events occurring in just the week-to-date:


  • Bloomberg news reported that reservations for more than 40,000 seats on All Nippon Airways flights were canceled from SEP to NOV as of yesterday, and Japan Airlines Co. had 15,500 cancellations as of Sept. 24.
  • Kyodo news says over 60 Japanese companies were told to leave a China trade show earlier this week.
  • Nikkei news reported that Nissan, Honda and Toyota are scaling back China production as anti-Japanese consumer sentiment is expected to impact sales.


It’s no surprise that corporate CDS in Japan are approaching 52-week wides, as indicated in the following chart:




The key risk here as it relates to our bearish thesis on the yen is that incremental economic weakness may force the BOJ to accelerate balance sheet expansion over the immediate-to-intermediate term via conventional or potentially non-conventional measures. The BOJ monetary policy meeting calendar is listed below; to the extent Sino-Japan tensions remain status quo or even deteriorate over this duration, we expect the JPY to weaken vs. the USD into and through these catalysts. The global Currency War remains in full force and Japan looks to take the baton over the next few months as the Fed is likely to be on a temporary hold with regards to pursing incremental “stimulus”.


  • OCT 4-5 (NOTE: A bleak Tankan Survey, which is due out 9/30, may actually set the stage for the BOJ to ease in back-to-back meetings here)
  • OCT 30
  • NOV 19-20
  • DEC 19-20


Our quantitative risk management levels on the yen are included in the chart below.


Darius Dale

Senior Analyst



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