Research Edge Position: Short Japanese equities via EWJ
The wife of presumptive DPJ Prime Minister Yukio Hatoyama has been receiving heavy media coverage in the west in recent days, with special attention being paid to her belief that she was abducted by aliens in her sleep and transported to another planet. Unfortunately for Japanese taxpayers, our initial read on the economic measures being pushed by the victorious Democrats after their historic win is that Mrs. Hatoyama may not be the only member of her household with a head in the stars.
With pre-election proposals that ranged from cash incentives to induce more couples to have babies in an attempt to stem the generational tsunami about to blast the Japanese pension system to reductions in highway tolls to get people on the road and spending, we anticipate that the new government will accelerate the growth of domestic Japanese government debt and accomplish little. Although the DPJ hasn’t even taken office yet the writing already seems to be on the wall; the fundamental weaknesses in the fabric of the Japanese economy have yet to be addressed meaningfully by leadership of either party.
Our strategic thesis on Japan is long, involved and makes for depressing reading. Our tactical thesis on Japan is short, simple and makes for some good trades: Yen UP/Stocks Down. In the first chart below we have illustrated this relationship over a three year horizon. In the second chart we have illustrated the way our models line up in the near term for the Nikkei. We are currently short Japanese equities via EWJ and may have gotten in a little too early –but there is nothing but downside from here as far as we can tell barring a declining Yen.