#QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS?

Takeaway: Japanese policymakers’ gross misinterpretation of economic history portends negatively for the ailing yen.

SUMMARY CONCLUSIONS:

 

  • Recent commentary confirms that Japanese policymakers are indeed channeling their inner-Takahashi (Japan’s most infamous money printer).
  • The key question as it relates to any potential Japanese sovereign debt crisis is whether or not this is 2003-06 all over again in Japan, with that occurrence demonstrating that a melt-down in JGB prices could perpetuate a sustained melt-up in Japanese equities.
  • Could, however, this time be different with all three of Japan’s major financial markets (currency, equities and bonds) eventually being lit on fire all at once? That remains the critical tail risk embedded in Japan’s aggressive Policies To Inflate over the long-term TAIL.
  • For now, stay short the yen and long JPY-funded carry trades. Let GPIF President Takahiro Mitani’s P&L woes continue to help get you paid on the long side of emerging market equities and FX.

 

The Japanese yen, which is down roughly -16% since we initially outlined our bearish bias back on 9/27, continues to get Taro Aso’d.

 

The latest developmental jawboning on this front has come in the form of Finance Minster Aso’s recent remarks that the Japanese government is taking a page out of its own historical playbook by pursuing strong anti-deflation policies:

 

“There is no one in the government, the bureaucracy or the BOJ who has experience in anti-deflation policy. We can only learn from history.”

-Taro Aso, 2/3/13

 

The history lesson Mr. Aso is referring to is Depression-era Japanese Finance Minster Korekiyo Takahashi’s mandating of the BOJ to directly monetize Japanese sovereign debt (as opposed to open-market operations), which began in 1932 and continued for the next 14 years.

 

During this era, the ratio of JGB issuance financed directly by the BOJ peaked at 89.6% in 1933 and remained elevated throughout the program. This monetization strategy assisted in doubling JGB issuance and boosting Japanese public expenditures by a whopping +34% in 1932 alone.

 

What is conveniently left out of Aso’s commentary is the fact that Japanese CPI readings peaked at rates north of +40% YoY throughout the 1930s during the aforementioned episode of aggressive sovereign debt monetization.

 

#QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS? - 1

 

We’re not sure where this fits in the context of this note, but it’s probably worth mentioning that Takahashi was literally assassinated for trying reign in public expenditures in 1936…

 

Phillips curve in hand(s), western economists and those schooled in western academia continue see little-to-no-harm in perpetuating inflation for the sake of achieving nominal GDP growth target(s). We’re not sure how the deflation-addicted JGB market will respond to all of this, but preliminary indications suggests not well:

 

  • Takahiro Mitani, the head of Japan’s public pension fund, said in a recent interview that the fund is considering changes to its asset structure for the first time in seven years amid rising concerns that Japan’s Policies To Inflate will erode the value of its JGB holdings, which currently equate to 64% of the fund’s assets. Emerging market stocks and alternative assets are two asset classes that he suggested GPIF may increase its allocation to in lieu of JGBs.

 

The key question as it relates to any potential Japanese sovereign debt crisis is whether or not this is 2003-06 all over again in Japan, with that occurrence demonstrating that a melt-down in JGB prices could perpetuate a sustained melt-up in Japanese equities.

 

#QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS? - 2

 

Could, however, this time be different with all three of Japan’s major financial markets (currency, equities and bonds) eventually being lit on fire all at once? That remains the critical tail risk embedded in Japan’s aggressive Policies To Inflate over the long-term TAIL.

 

For now, stay short the yen and long JPY-funded carry trades (email us if you’re interested in specific ideas). Let Mitani’s woes continue to help get you paid on the long side of emerging market equities and FX. Key policy catalysts are outlined in the list below.

 

Darius Dale

Senior Analyst

 

#QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS? - 3


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