Research Edge Position: Short EWJ

The Aso administration's call for an election on August 30 is being reported in the media as the curtain being lowered on the LDP's domination of government in Japan for an entire generation.  With a moribund economy, a vicious demographic curve looming ever larger and a national debt that, at 200% of GDP, which is staggering, a defeat for the incumbent party is a foregone conclusion.

Today's consumer confidence data reading from the cabinet office showed a marginally positive reading for at least one aspect of the Aso' government's stimulus package. Despite worries about job security and future earnings, consumers seem primed to start buying durable goods to take advantage of the various government price rebate incentives and corporate discounting (with the Tokyo specific index showing more pronounced divergence than the national index).


Leadership with the Democratic Party -which is expected to have an easy victory in the upcoming polling, has zeroed in on dollar replacement rhetoric as a substitute for any proposal to encourage growth for the stagnant domestic economy.  Mashaharu Nakagawa's comments last week on a move to hold more Euro or IMF denominated debt.

Politicians aren't the only ones longing for a strong dollar, Japanese equity investors remained focused on currency valuation as the sole near term positive catalyst for Japanese export dependent industrials who are floundering in a strong yen environment. 


If you have been reading our work for a while, you are aware that we view the Japanese economy of something of a ponzi scheme, with massive debt held domestically by a rapidly ageing population who are receiving little or no yield for their trouble.  As more and more seniors starting drawing down their savings and receiving pensions, the pressure on policy makers intensifies to find new methods of stimulating growth -so far Aso's appliance coupons and reduced road tolls have failed to spur the internal demand growth.  It remains to be seen if the Democratic Party will assemble an economic platform that contains any original ideas -or simply more of the same short term incentives for consumer spending that the LDP has relied on.

We are currently short Japanese equities via EWJ with a long term negative bias.  We see no long term or intermediate duration factors which could conceivably drive Japan's economy to recover in advance of the US and European customer markets they depend on.

Andrew Barber


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