Going Back Into Japan

The smart people I know believe that prime minister Shinzo Abe?s plans to revive the Japanese economy will succeed, paving the way for a decade long bull market that will take the Nikkei Index ($NIKK) up to new highs. The dumb people I know argue vociferously and passionately that Abe will fail miserably, and that the economy and stocks will crash and burn as early as next year.

I think I?ll go with the smart people.

Last night, we learned that Japan?s Government Pension Investment Fund (GPIF) is going to carry out a massive reallocation out of domestic government bonds and into risk assets. The move not only sent Japanese shares flying, it has major implications for US and European markets as well.

The GPIF is the world?s largest pension investor, with a staggering $1.23 trillion in assets. It will boost its allocation to domestic shares from 11% to 12%, unleashing $12 billion in net stock buying. A far more impressive $37 billion has been earmarked for foreign stock markets. This will come at the expense of bonds, which will see their share cut back from 67% to 60%.

The move was triggered by the terrible performance of the Japanese government bond market this year, which has seen prices plunge and yields soar. Since the 2012 lows, the ten-year JGB yield has ratcheted up from an unbelievably low 0.39% to as high as 1.20%, a threefold increase. This dragged down the overall return on investment for the GPIF to the lowest levels in history. Since the demands by Japan?s retirees are expected to skyrocket from here, the fund had little choice but to move out substantially on the risk spectrum.

This is most likely only the opening salvo of the multiyear Great Rotation by the GPIF out of bonds and into stocks globally. The GPIF is not only attracted by the far higher dividend yields and capital gains offered by foreign stocks. A weakening Japanese yen will also juice profits when translated back to the home currency.

In the meantime, it is pedal to the metal for Mr. Shinzo Abe, whose late father, Shintaro, I knew well. He is betting the future of the country on a potent, and unprecedented, mix of fiscal stimulus, monetary easing and deregulation. The Bank of Japan has been leading the charge here, targeting a 2% inflation rate in two years, and promising to double the money supply. My own forecast is that this package will eventually take the Japanese yen down from today?s ?99 to ?150 to the dollar.

If you are an old fart like me you will recognize this approach. President Ronald Reagan employed a similar strategy to get the US economy off the mat in the wake of the 1974 and 1980 oil crisis and the stagflation that followed. This paved the way for a move in the Dow Average from 600 to 15,000. Nope, newbies, that is not typo. It really happened. If nothing else, the Japanese are great students of history, perhaps better than we are.

The other incentive to make a move on the (DXJ) here is that a further move down in the Japanese yen (FXY), (YCS) is imminent. It has been hovering just below ?100 for six months now, and is on the verge of launching into a new leg down. All that has been missing until now has been the trigger for the break. The GPIF move could be it.

I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click here http://madhedgefundradio.com/rumblings-in-tokyo-2/, ?and here http://madhedgefundradio.com/new-boj-governor-craters-yen/, and finally one more http://madhedgefundradio.com/new-boj-governor-crushes-the-yen/.