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Takeaway: A monetary policy vacuum in Japan coupled with a monetary policy reversal in the US spoils the risk/reward of staying short the yen here.

SUMMARY BULLETS:

  • The two most important things we think investors should glean from today’s BoJ monetary policy statement are:
    • A) there will be no preemptive easing measures to cushion the economic blow stemming from the sales tax increase; and
    • B) the likelihood of additional monetary stimulus post the tax hike is now much lower than what has been baked into market expectations.
  • On the margin, this is a fairly meaningful shift in the direction of marginally hawkish.
  • As such, we now feel comfortable booking the gain on our yen short. The FXY ETF is down -5.5% since we began risk managing it as part of our firm-wide Best Ideas list on FEB 27. Moreover, the USD has appreciated +25.6% vs. the JPY since we introduced the our bearish bias on the yen to the Street from a research perspective back in SEP ’12.
  • Additionally, the Nikkei 225 Index has appreciated +60.1% since we began explicitly calling for commensurate Japanese equity reflation back in NOV ’12. It’s also important to note that the Nikkei experienced a peak-to-trough decline of -20.4% in the three weeks following its MAY 22 YTD high on the very same thing we said would eventually trigger a broad-based fading of Japanese equity beta back in NOV ’12 (i.e. JGB volatility).
  • At the conclusion of this note, you’ll find a compendium of our research on this idea for your review.

Today’s BoJ monetary policy update provided us with a meaningful amount of clarity on what to expect out of the BoJ over the next 3-6M:

Nothing.

Specifically, the BoJ is opting to stand pat on its current policies for the foreseeable future, which have remained unchanged since they introduced their “shock and awe” package back in early-APR of this year.

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - BOJ Balance Sheet Projections APR  13

When asked whether or not the government’s ¥5T stimulus package will reduce the likelihood of the BoJ having to implement additional easing measures in the wake of the FY14 sales tax increase, Governor Haruhiko Kuroda responded, “I think so”. He stressed that the aforementioned stimulus will be a “significant plus” for the growth rate of the Japanese economy.

The two most important things we think investors should glean from this information are: A) there will be no preemptive easing measures to cushion the economic blow stemming from the sales tax increase; and B) the likelihood of additional monetary stimulus post the tax hike is now much lower than what has been baked into market expectations.

On the margin, this is a fairly meaningful shift in the direction of marginally hawkish.

What is increasingly looking like a 3-6M (and potentially 9M) monetary policy vacuum in Japan does not bode well for further appreciation in the USD/JPY cross over the intermediate term – especially in the context of the Federal Reserve’s recent decision not to taper.

As we highlighted in an intraday research note yesterday, the Fed’s latest easy-money policy may create a reflexive cycle of slower growth (via #DownDollar and reduced growth signals/expectations in the marketplace) and more easy money in the process. From here, tapering seems like as much of a slam dunk as the 0-4 New York Giants winning Super Bowl XLVII.

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - DXY

As such, we now feel comfortable booking the gain on our yen short. The FXY ETF is down -5.5% since we began risk managing it as part of our firm-wide Best Ideas list on FEB 27. Moreover, the USD has appreciated +25.6% vs. the JPY since we introduced the our bearish bias on the yen to the Street from a research perspective back in SEP ’12.

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - USDJPY

Additionally, the Nikkei 225 Index has appreciated +60.1% since we began explicitly calling for commensurate Japanese equity reflation back in NOV ’12. It’s also important to note that the Nikkei experienced a peak-to-trough decline of -20.4% in the three weeks following its MAY 22 YTD high on the very same thing we said would eventually trigger a broad-based fading of Japanese equity beta back in NOV ’12 (i.e. JGB volatility).

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - Nikkei 225

We hope you enjoyed this idea while it lasted and we’ll of course be back with more macro investment ideas in the near future. Please join us on our Q4 Macro Themes call next Friday at 11am for clues as to what those ideas may be.

Have a great weekend,

Darius Dale

Senior Analyst

REVIEWING THIS IDEA

9/27/12: IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE

Takeaway: We're shorting the Japanese yen here as risk heightens across the Japanese economy and Japanese capital markets.

10/26/12: IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA

Takeaway: We remain bearish on the JPY relative to the USD across our TRADE, TREND and TAIL durations.

11/9/12: THINKING THROUGH A POTENTIAL CURRENCY CRISIS IN JAPAN

Takeaway: We are once again short the yen and remain bearish on the JPY in light of Japan’s deteriorating cyclical and structural GIP outlooks.

11/15: HEDGEYE BEST IDEAS CALL

Replay Podcast

Slides

12/17/12: BEST IDEAS UPDATE: IS THE USD/JPY CROSS GOING TO ¥100?

Takeaway: We continue to see risk that Japan experiences a currency crisis (peak-to-trough decline > 20%) over the intermediate term.

12/26/12: JAPAN TO LOOSEN FISCAL POLICY AS WELL

Takeaway: Japan’s fiscal POLICY outlook augurs bearishly for the yen over the intermediate term.

1/9: CONTEXT AROUND RECENT POLICY DEVELOPMENTS IN JAPAN

Takeaway: Japanese policymakers continue to attack the yen, both rhetorically and with incremental POLICY maneuvers.

1/10: EARLY LOOK: JAPAN'S BATTLE OF DIU

Takeaway: And while we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term, we continue to flag material risk of Japanese currency and sovereign debt crises borne out of those same policies with respect to the long-term TAIL.

1/16: BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE

Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.

1/22: #QUADRILL-YEN: NOT YET, AT LEAST

Takeaway: While the BOJ disappointed short-term market expectations, we still think the outlook for Japanese monetary POLICY is decidedly dovish.

2/4: #QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS?

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

2/12: CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN

Takeaway: The path towards a lower yen is once again clear with the recent mollification of int’l criticism of Japan’s “beggar thy neighbor” policies.

2/14: STAY SHORT THE YEN

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

2/25: #QUADRILL-YEN: WHO IS HARUHIKO KURODA?

Takeaway: A confirmation of Haruhiko Kuroda as the next BOJ governor is explicitly bearish for the Japanese yen over the intermediate-to-long term.

2/27: HEDGEYE BEST IDEAS CALL

Replay Podcast

Slides

3/11: BEST IDEAS UPDATE: LONG CHINA; SHORT YEN

Takeaway: On balance, this weekend’s data is unsupportive of our bullish bias on Chinese equities and very supportive of our bearish bias on the yen.

3/15: JAPAN'S "INVERSE VOLCKER MOMENT IS UPON US

Takeaway: The confirmation of H. Kuroda, H. Nakaso and K. Iwata as governor and deputy governors of the BOJ is structurally bearish for the yen.

4/1: BEST IDEAS UPDATED (LONG CHINA; SHORT YEN)

Takeaway: The latest econ data releases are very much in support of our theses. No change to either fundamental view for now.

4/4: "KURODA'S CASINO" IS NOW OPEN FOR BUSINESS

Takeaway: Stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”.

4/19: BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN

Takeaway: it is our view that investors would be remiss to allow the overt hypocrisy of the US government scare them out of the short yen/long Nikkei trade, which we still think has legs with respect to the intermediate term.

4/30: IS GOOD DATA BAD FOR THE YEN?

Takeaway: If improving economic data helps get the LDP elected to an Upper House majority come July, it’s ultimately structurally bearish for the yen.

5/10: TRADING ABENOMICS FROM HERE

Takeaway: Post the Diet Upper House elections in JUL, the core driver of the USD/JPY cross will increasingly become the state of the US economy.

5/15: IS JAPAN SIGNALING AN END TO THE “END OF THE WORLD” TRADE?

Takeaway: If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending.

5/22: JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?”

Takeaway: Our fundamental research & quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate.

6/5: SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE?

Takeaway: If you’re bearish on US growth, get long the yen and short the Nikkei with impunity. Do the opposite if you’re constructive on US growth.

6/7: YEN CAPITULATION?

Takeaway: If you weren’t long the dollar-yen rate prior to yesterday’s bloodbath, you’re getting an excellent buying opportunity here.

6/13: JAPAN STRATEGY UPDATE: IS THE ABENOMICS TRADE OVER?

Takeaway: Trading Abenomics from here depends primarily on your specific investment duration.

6/19: REMEMBER, WE’RE IN THE VERY EARLY INNINGS OF ABENOMICS

Takeaway: We reiterate our long-term research conclusions for Japanese policy and its expected impact(s) upon various financial markets.

7/22: RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS”

Takeaway: We remain bearish on the Japanese yen and Chinese financials stocks with respect to the intermediate-term TREND and long-term TAIL.

7/29: LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE?

Takeaway: The Abenomics trade is now squarely underwater with an increasingly convoluted immediate-to-intermediate-term outlook.

8/12: EARLY LOOK: Missing Something

Takeaway: In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well

8/12: JAPAN’S WEAK ECONOMY + CONSUMPTION TAX HIKE = BOJ EASING… OR ELSE

Takeaway: The case for incremental monetary easing amid fiscal tightening (via the consumption tax hike) grows louder in Japan.

10/2: GET TIGHT AND TRADE THE RANGES IN JAPAN

Takeaway: Investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.