DELAYING THE INEVITABLE INCREASE IN RATES

Official Japanese unemployment for February released yesterday registered at 4.4%, the highest level in 3 years. After increasing rounds of layoffs and plunging sentiment survey levels in recent weeks it came as little surprise when cabinet office wage data -also released on Tuesday, showed a decline of 2.7% Y/Y for Feb and household spending declined by 3.5% Y/Y for the same period. This fall-off in wages and spending underscores the complete dependence of the second largest economy on earth on external demand for a recovery and supports our thesis that the only driver for the equity markets in the near term remains the Yen’s relative strength or weakness.  

The most eye popping data point of the week so far is the revised OECD estimates of debt to GDP for next year, which rose to a whopping 197.3%. With a balance sheet that leveraged, the question I keep asking myself is –how long can yields remain so low?  After years of stagnation when rates remained at rock bottom has investor complacency become so entrenched that the 2 year will continue to hold below 0.5% despite increasingly heavy debt levels supported by an increasing weakened economy?  Surely at some point something has to give.

We are short the Japanese equity market via EWJ, and will opportunistically seek opportunities to trade other parts of the capital structure there as prices and data change.

Andrew Barber
Director

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