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Takeaway: Japan’s bleak cyclical data remains the perfect handoff to the structural policy changes outlined in our bearish thesis on the yen.

SUMMARY CONCLUSIONS:

  • Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27.
  • With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).

MAJOR DEVELOPMENTS: On Tuesday, we published a note titled CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN; to the extent you may have missed it come through, please review that as a preamble to the brief prose below.

  • GDP bomb = recession continues: Japan’s 4Q Real GDP figures were released overnight and they left much to be desired in the way of healthy economic growth: +0.3% YoY from +0.4% prior; -0.1% QoQ from -1% prior vs. +0.1% Bloomberg consensus estimate; -0.4% QoQ SAAR from -3.8% prior vs. +0.4% Bloomberg consensus estimate. This confirms our call for Japan’s recession to extend into a third-straight quarter.
  • Things are picking up, though?: The conclusion of the BOJ’s latest two-day policy meeting produced little in the way of critical policy developments. The ¥76T Asset Purchase Program, ¥25T Bank Credit Program and ¥1.8T of monthly JGB purchases were all left on hold – as was the 0.1% Call Money Rate. What did qualify as news was board upping its view of the Japanese economy to “… appears to have stopped weakening” from “… remains relatively weak” at the prior meeting. This delta is more influenced by the timing of recent fiscal stimulus spending and improved consumer and business confidence figures than actual economic growth indicators – which remained very subdued in JAN-to-date.
  • Shirakawa’s last ride: The next BOJ meeting on MAR 7 will be the final meeting presided over by Governor Masaaki Shirakawa’s and his two deputy governors Hirohide Yamaguchi and Kiyohiko Nishimura. In rejecting Ryuzo Miyao’s call for a pledge of ZIRP until the inflation target is “in sight”, the three amigos signaled they want to ride off into the sunset much like former ECB President Jean-Claude Trichet – appearing uncompromised, unwavering towards market or political demands.
  • The next guys and gals won’t be so lucky:Much like Mario Draghi has become with respect to European banksters and financial market participants, we continue to believe their replacements will become more-or-less puppets of the Abe administration’s broader political agenda for the Japanese economy – which is +5% “monetary math” (+3% nominal growth and +2% inflation). From an intermediate-term TREND and long-term TAIL perspective, we expect whomever is running the BOJ to do “whatever it takes” to meet the aforementioned targets.
  • Minor hiccups may remain though: One very minor hurdle on the track to ‘USD/JPY = ¥100’ is Your Party’s recent pre-rejection of Haruhiko Kuroda and Toshiro Muto as candidates to be the next head of the BOJ because they are ex-MOF officials. That leaves only former BOJ Deputy Governor Kazumasa Iwata as the only consensus candidate remaining that stands to make it past the Upper House vote where the LDP does not have a majority. Dare we say a dark horse currency debaucher will emerge as the next BOJ head?
  • G20 Summit = all eyes on the yen: Another potential hurdle is this weekend’s G20 Summit. If, however, the G7 statement issued earlier this week is any indication of this weekend’s pending takeaways, we continue to anticipate muted international resistance to Japan’s Policies to Inflate. For now, it appears no country is fully prepared to officially stand in the way of the Japanese Cabinet Office’s political objectives. Japan’s awful 4Q GDP miss supports this conclusion in that it likely buys Japan more international goodwill/scope to carry on debauching.
  • Where to from here?: Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27. With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).

Darius Dale

Senior Analyst

 

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STAY SHORT THE YEN -  Quadrill yen Catalyst Calendar