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February Customs office trade data arrived overnight, confirming what everyone watching already knew: Japanese exports, while marginally higher than in January, have declined YTD to the lowest absolute levels in a decade and the lowest year-over-year levels in more than 30 years.

Prime Minister Aso is hard at work on a third stimulus program as carmakers and electronics producers step up the pace of layoffs, but the truth is that there is little that the government can do now to fix the problems that Japan faces. As an export dependent economy which sells big ticket consumer products to wealthy European and North American markets, the Japanese are hostage to declining demand from their clients that can only be offset by a weakened Yen.

We have been short the Japanese equity market –and wrong, for the past week because we anticipated that the BOJ’s attempts to weaken the Yen through a treasury repurchase program would not stem the tide of Dollar-devaluation driven by the Fed’s own massive repurchase. Japanese public debt currently stands at 170% of GDP, so a 1.8 trillion Yen per month debt purchase by BOJ seems unlikely in the long term to protect yields or the currency as the government prepares additional stimulus measures that may easily add 15 to 20 trillion in debt issuance in this round alone.

We have also heavily discounted the impact of any increase in internal demand spurred by the BOJ’s bank loan program; which I see as essentially a margin-call-reset for underwater stock portfolios that cannot possibly convince Japanese consumers to stop hoarding savings to the extent that it will offset contracting external demand meaningfully.

The Yen has weakened against the dollar and we are now down by nearly -4% on our short as the Japanese equity markets are trading on a one factor basis, a factor which I was flat footed on tactically and which has cost us.

We continue to view the Japanese market negatively. After the “lost decade” another prolonged period of rising unemployment (and, critically, underemployment) will wreak further social havoc -keeping a lid on domestic consumption and leaving Japanese firms to wait for a rebound in US and EU spending.

Importantly, the competitive capacities of the ASEAN manufacturing centers (not to mention South Korea and Taiwan) seem better postured top participate in the growth of Chinese consumption. We continue to have a negative bias on the Japanese equity markets, but must trade it tactically. We remain short the Japanese etf, EWJ.

Andrew Barber
Director