For the first time in history, a national election will be held over monetary policy. I’m not talking about putting quantitative easing up for a vote here in the US. It is Japan that is asking the average voters whether its central bank should be speeding up the printing presses, or slowing them down.
While this may appear an obscure development in a faraway country on the other side of the world, the fact is the Japanese election could have an important effect on the value of your investment portfolio. This is especially true if you have recently been following my Trade Alerts, and have short yen positions up the wazoo.
The issue came to the fore when Prime Minister Yoshihiko Noda dissolved the Diet this week, Japan’s parliament, and called for snap elections. The outcome will decide if the country will see its eighth prime minister in seven years. What a revolving door they have in Tokyo!
The contest will pit Noda, leader of the country’s Democratic Party, against Shinzo Abe, head of the conservative Liberal Democratic Party. Abe formerly served as prime minister during 2006-2007. He comes from a storied political family in western Japan that has been active in running the country since WWII. I knew his dad, the nationalist Shintaro Abe, when I covered Japanese politics during the seventies and eighties, who fell short in his own run for the top job.
Abe has made the weakening Japanese yen the top policy priority for a new administration. This will be accomplished by ordering the Bank of Japan to target an inflation rate that is triple the current level, reducing short-term interest rates to below zero, vastly expanding asset purchases to stimulate the economy, and accelerating the growth of the money supply.
The currency markets responded immediately by taking the yen down by 2.4% against the dollar, the sharpest drop in nearly a year. The yen is now plumbing a six-month low at ¥81.80. I think this will move will eventually take the cash market from the ¥79 seen a week ago to the February low of ¥84. For the Currency Shares Japanese Yen Trust ETF, this means a swan dive from a post QE3 peak of $128 down to $118. The shorts are smiling.
The only problem with these measures is that they are about 20 years too late. The country has averaged a subterranean 1% GDP growth rate since 1990. Regular readers of this letter are already well aware of my antipathy towards the Japanese yen (click here for my October piece, “The Fat Lady is Singing for the Japanese Yen” ).
The country’s current political dispute with China has sent its trade balance falling off a cliff. The economy is solidly in recession, shrinking at a 3.5% annual rate. Q3 GDP just came in at -0.9%. Now, the Ministry of Finance is holding emergency meetings with the country’s bond syndicates over how to expand government borrowing beyond a staggering 240% of GDP (America’s is only at 100%). What we could be seeing here is the beginning of a great unraveling that could eventually take the yen from ¥76 to ¥85, then ¥90, ¥100, ¥120 and even ¥150 to the dollar in coming years.
Prime Minister Noda currently suffers a popularity rate of a lowly 17% with the electorate. Abe is ahead in the polls by 15%, so he is a shoe-in to win the December 14 election. You should be hammering every rally in the Japanese yen from here on, and buying every dip in the ProShares Ultra Short Yen ETF (YCS), a 200% leveraged fund than benefits from a falling yen.
Japan’s New National Flag