look at JPY...

The yen surged and the euro jumped as Italian and Spanish bonds sank after European Central Bank President Mario Draghi said further stimulus measures will be left “on the shelf” as growth returns. U.S. stocks and Treasuries rose before jobs data tomorrow.

The yen rallied 2.1 percent to 97.06 per dollar and jumped as much as 3.2 percent, the most since 2011, while the 17-nation euro increased as much as 1.6 percent to a three-month high of $1.3306. Yields jumped more than 20 basis points on the 10-year debt of Italy, Spain and Portugal. The Standard & Poor’s 500 Index rose 0.8 percent to 1,622.46, rebounding from a one-month low, while the Stoxx Europe 600 Index retreated 1.2 percent. Ten-year U.S. Treasury yields declined 1.5 basis points to 2.07 percent after rising as much as four points earlier.

Japan’s currency strengthened against all 16 major peers as traders unwound bets on a weaker yen based on the Bank of Japan’s monetary stimulus plan. U.S. jobless claims declined last week before a report tomorrow projected to show payrolls grew, fueling debate over whether the Federal Reserve will plan to reduce bond purchases. The euro-area will return to growth by the end of the year, Draghi told a press conference after ECB policy makers left their benchmark rate at 0.5 percent.

Draghi’s statement about no further stimulus weakened the U.S. dollar against the euro and the yen,” Donald Selkin, who helps manage about $3 billion of assets as the chief market strategist at National Securities Corp. in New York, said in a phone interview.


Source: http://www.bloomberg.com/news/2013-06-06/asian-stocks-retreat-to-four-m…
 

The Japanese government is failing to manufacture inflation... decade long liquidity trap = deflation pressure = Yen strength

The problem is Japan's demographics... the aging population won't be able to be sustained by young professionals. Eventually there won't be enough domestic capital to support the government's perpetual budget deficits. When Japanese individuals do not buy their own debt there's no way the country will be able to borrow from abroad at 1%.

 

I read an interesting piece from Maudlin that said that the Japanese government can't really fund itself with its people as is.

I think part of the issue is also that there's been a culture of deflation for a generation. It's difficult to reverse that.

 
FundofFun:

I read an interesting piece from Maudlin that said that the Japanese government can't really fund itself with its people as is.

I think part of the issue is also that there's been a culture of deflation for a generation. It's difficult to reverse that.

It can't. I've also read Mauldin's book "Endgame". He wrote how all global macro traders keep losing money shorting the country's debt nevertheless. I know Kyle Bass has been bearish on the Nikkei the crisis... probably lost a pretty penny.

 
mb666:
FundofFun:

I read an interesting piece from Maudlin that said that the Japanese government can't really fund itself with its people as is.
I think part of the issue is also that there's been a culture of deflation for a generation. It's difficult to reverse that.

It can't. I've also read Mauldin's book "Endgame". He wrote how all global macro traders keep losing money shorting the country's debt nevertheless. I know Kyle Bass has been bearish on the Nikkei the crisis... probably lost a pretty penny.

If Mauldin said that "Japan can't fund itself", he's being a bit of an idiot for a sake of a sensationalist headline. It's an incredibly silly thing to say, assuming he did say such a thing. Kyle Bass's pronouncements on Japan have been wrong for so long now and so costly to the investors in his "Japanogeddon" fund, I don't understand why anyone still cares what he thinks about Japan.

And yes, the JGB mkt is a well-known graveyard for the clueless gaijin punters.

 
FundofFun:

Everybody always says a trade is crowded until it isn't. It may not be today, but I think we're going to see an aggressive move downward.

Erm, all you need to do is look at the CTA returns up to the month of May and then for May itself... It will become reasonably clear that Japan (both ccy and NKY) is still a very crowded trade indeed. As to when it stops being a crowded trade, I haven't the slightest.
 
Martinghoul:
FundofFun:

Everybody always says a trade is crowded until it isn't. It may not be today, but I think we're going to see an aggressive move downward.

Erm, all you need to do is look at the CTA returns up to the month of May and then for May itself... It will become reasonably clear that Japan (both ccy and NKY) is still a very crowded trade indeed. As to when it stops being a crowded trade, I haven't the slightest.

I agree that both short Yen and long Nilkkei positions have been extremely crowded positions for more than a year, but most CTAs, particularly trend following ones that make up the majority of them, have been well positioned to exploit those moves by being net short Yen and long Nikkei. The only ones that are caught in this reversal are the very long term trend followers (ex Winton, but they're basically a systematic rates and FX shop given their size).

 
Martinghoul:
FundofFun:

CTA being managed futures? Forgive me, but I'm unfamiliar with the term.

CTAs being, more broadly, large, liquid, mostly model-driven funds, such as Man AHL, Winton or BlueTrend.

Thanks. I'll have to look into that.

 
Best Response
couchy:

i have no idea what you guys are saying in this thread. Nubcake Explanation please?

The basic argument is whether Japan's inflation goals are unsustainable, its economy will fail to find traction, and its currency will once again strengthen (specifically relative to the USD). I'm positing that the moves over the past few days are due to the markets finally coming in line with the fundamentals. Martinghoul explains that the trade was crowded (a lot of bets on JPY weakening relative to USD), and that people are unwinding their trades to better position themselves (for what, I don't know).

Abenomics, the economic plan put for by Prime Minister Shinzo Abe (Abe + economics = Abenomics), calls for inflation to stimulate the economy. For the past two decades or so, Japan has experience deflation, when a dollar tomorrow is worth more than a dollar today. He's hoping that by stimulating inflation he can force people to again spend money and to devalue the currency enough to let Japan become an exporting powerhouse again.

I think there's one thing to consider here that I don't think is discussed enough, which is that Japan is a net energy importer due to their reducing their use of nuclear power in light of the Fukushima incident. They import other commodities as well. If you're a net commodity importer, the weakening of the currency increases the cost of imports, which should make it hard to manufacture at low cost and stimulate exports.

 
FundofFun:

I think there's one thing to consider here that I don't think is discussed enough, which is that Japan is a net energy importer due to their reducing their use of nuclear power in light of the Fukushima incident. They import other commodities as well. If you're a net commodity importer, the weakening of the currency increases the cost of imports, which should make it hard to manufacture at low cost and stimulate exports.

If imports are more expensive, they may get inflation, which they want. The japanese people may be able to afford less stuff, but that doesn't seem to be a worry right now.

As for exporters, some of the costs for some of the exporters go up, but 100% of their international prices can go down. The net effect is still very export friendly. As a random example, even after all the volatility, Toyota is still more than 50% up for the last 52 weeks.

 

Correct me if I'm wrong, but I believe that Toyota has a major manufacturing operation in the states. The fact that more valuable US dollars are coming to Toyota at no additional expense to Toyota is bolstering the share price.

Also, Japan has serious trade deficit issues, and I think it's an uphill battle to reverse it. When you combine their higher materials costs with higher labor costs, it seems like devaluing the currency enough to export the quantities needed to promote growth is going to very difficult. While their prices can go down, I'm not sure that they can go down enough to compete.

 
FundofFun:

Correct me if I'm wrong, but I believe that Toyota has a major manufacturing operation in the states. The fact that more valuable US dollars are coming to Toyota at no additional expense to Toyota is bolstering the share price.

Yeah, and that's basically my point as well. Some of their costs are in cheap yen - most of their revenues are in strong dollars. And that's good.

On Abenomics, I think it's a pretty decent idea. They can't do much else besides trying to lift the animal spirits. Monetary and fiscal policies attempt to do that. And the third arrow (structural) can bring some real improvements to the economy, if he manages to do that well. That's a pretty huge if, but still there aren't may great options for Japan due to demographics, worldwide productivity changes, etc...

If in 10 years most japanese women are working and there are no more stupid subsidies everywhere, Japan may have a sweet deal going on. It is very far fetched, but what else can they do? Austerity?

 
Improving:
FundofFun:

Correct me if I'm wrong, but I believe that Toyota has a major manufacturing operation in the states. The fact that more valuable US dollars are coming to Toyota at no additional expense to Toyota is bolstering the share price.

Yeah, and that's basically my point as well. Some of their costs are in cheap yen - most of their revenues are in strong dollars. And that's good.

I think you're misunderstanding me. The majority of their costs are variable, ie, the manufacture of the vehicles. If you manufacture in the US, you get the same dollars as before, but more yen. This doesn't mean that Toyota benefited from increased exports. They're benefiting directly from the depreciation of the currency. Toyota's share price should fall as the currency strengthens again, but not for the reason you're thinking.

 
FundofFun:

Correct me if I'm wrong, but I believe that Toyota has a major manufacturing operation in the states. The fact that more valuable US dollars are coming to Toyota at no additional expense to Toyota is bolstering the share price.

Also, Japan has serious trade deficit issues, and I think it's an uphill battle to reverse it. When you combine their higher materials costs with higher labor costs, it seems like devaluing the currency enough to export the quantities needed to promote growth is going to very difficult. While their prices can go down, I'm not sure that they can go down enough to compete.

Japan's trade deficit is mostly a function of them turning their nuclear reactors on or off, last time I checked.
 
Martinghoul:
FundofFun:

Correct me if I'm wrong, but I believe that Toyota has a major manufacturing operation in the states. The fact that more valuable US dollars are coming to Toyota at no additional expense to Toyota is bolstering the share price.
Also, Japan has serious trade deficit issues, and I think it's an uphill battle to reverse it. When you combine their higher materials costs with higher labor costs, it seems like devaluing the currency enough to export the quantities needed to promote growth is going to very difficult. While their prices can go down, I'm not sure that they can go down enough to compete.

Japan's trade deficit is mostly a function of them turning their nuclear reactors on or off, last time I checked.

If they're not turning them back on though, won't it persist?

 

As Abenomics fails they will eventuall have to start buying basically all their bonds so the rates don't increase, and like mentioned before wirth debt/gdp levels if thier yoedls were to get close to even 2% they would begin to be in huge trouble.

"When you expect things to happen - strangely enough - they do happen." - JP Morgan
 
eignenvector:

As Abenomics fails they will eventuall have to start buying basically all their bonds so the rates don't increase, and like mentioned before wirth debt/gdp levels if thier yoedls were to get close to even 2% they would begin to be in huge trouble.

A little confused... so the Japanese central bank will print money to buy debt from the government to depress rates? So how with these low rates will it attract capital from abroad? What American will be willing to buy 10-year bonds returning 2% a year (while also be exposed to currency risk)? Investors will be able to get a the same rate with much less risk in debt from countries such as the US.

When Japanese citizens stop buying their government's debt the country is f***ked, It will have to default one way or another.

 
mb666:
eignenvector:

As Abenomics fails they will eventuall have to start buying basically all their bonds so the rates don't increase, and like mentioned before wirth debt/gdp levels if thier yoedls were to get close to even 2% they would begin to be in huge trouble.

A little confused... so the Japanese central bank will print money to buy debt from the government to depress rates? So how with these low rates will it attract capital from abroad? What American will be willing to buy 10-year bonds returning 2% a year (while also be exposed to currency risk)? Investors will be able to get a the same rate with much less risk in debt from countries such as the US.

When Japanese citizens stop buying their government's debt the country is f***ked, It will have to default one way or another.

No, the BoJ will buy debt to, hopefully, ignite some economic activity. Japan doesn't need capital from abroad to finance itself or, at least, not yet.

Again, you need to think a bit more carefully about this. Why is the country f*cked when/if its citizens stop buying govt debt?

 

Well that was quite the clean out. I think it was all positioning. US rates finished the day higher across the curve and stocks are now 35 points off the Thursday low. If you can sit through 250 pips of intraday volatility, then maybe it's worth a go down here. The National government has too much to lose by backing off their new nationalist policies, and something I don't think a lot of people are thinking of is the bar for BoJ intervention has been lowered considerably and I wouldn't be surprised to see them step in if we trade below 92 or 90. Those looking for a crisis trade aren't going to find it here, but EM is giving the world a heart attack right now. Basically if US 10s return to 3% on good data, what is the point of having local holdings in some of these nastier EM territories like South Africa, Turkey, Hungary, of even China? You can make a pretty convincing case that there isn't, and something like usdzar ends up at 12 or 15 very quickly.

 
Martinghoul:

This time it's different, eh? There's a famous quote from John Templeton on this subject, if I am not mistaken.

We shall see how it all turns out. It will be an interesting ride.

Lol it is different when you're at 215% debt-to-GDP, are increasing your deficit annually by 8% and compounding, have a negative population growth, are losing manufacturing and innovation competitiveness, etc.

Ironically, the "This Time is Different" thesis asserts that governments with high debt ratios will inevitably suffer from low economic growth.

 
mb666:
Martinghoul:

This time it's different, eh? There's a famous quote from John Templeton on this subject, if I am not mistaken.
We shall see how it all turns out. It will be an interesting ride.

Lol it is different when you're at 215% debt-to-GDP, are increasing your deficit annually by 8% and compounding, have a negative population growth, are losing manufacturing and innovation competitiveness, etc.

Ironically, the "This Time is Different" thesis asserts that governments with high debt ratios will inevitably suffer from low economic growth.

Could be you're right... Given the litany of issues you have listed, shouldn't yen be worthless here?

As to the R&R book/papers, there's really nothing "inevitable" about their thesis, IMHO.

 

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