We shorted the Japanese equity Market on Tuesday morning via the ETF EWJ, selling into a rally in response to an increase in the BOJ’s treasury purchase program and loans to banks –measures that look like too little, too late.

Today, in the shadow of the Fed’s 1 trillion DOLLAR bond purchase program, the BOJ’s 1.8 Trillion YEN a month program looks even more anemic. With the prospect of a weak dollar comes a return to the pain for Japanese exporters and the Nikkei retreated by 30 basis points.

For Japan’s leaders the pressure to find ways to stimulate the economy in the face of decimated demand from US and European markets is daunting. With an export industry that is dependent on big ticket consumer discretionary products, retooling for the current Chinese market is not a viable option and, although Chinese consumer spending is still growing (including a recent boost in car sales spurred by stimulus measures), buyers there are still years away from making up for the slack in high end US automotive and consumer tech sales. On the domestic front it seems increasingly unlikely that consumers will be convinced to start draining the savings they built up over decades of stagnation coupled with zero interest rates based on the historic low spending expectations included in the latest consumer confidence survey data. In the near term, all of these factors leave business leaders in Tokyo hostage to currency fluctuations.

As long as the dollar continues to weaken against the Yen, we expect key sectors of the Japanese equity market to remain under pressure and we will maintain our tactical short bias.

Andrew Barber

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