Tag Archives: abe

Why Abe & Adult Diapers Make Shorting Japanese Yen A Sweet-Smelling Deal! (Op-Ed)

As many of you know, the lower hours elections were held in Japan today and the LDP and New Komeito Alliance scored a clear victory. It means the likely return of Shinzo Abe aka Mr. Bond, Japan Bond, to his starring role as prime minister of the country. Financial blogger and twitterdachi, Finansakrobat has a piece on the economic repercussions worth reading (while at your desk or in the bathroom.)  Reprinted with his kind permission.

WHY ADULT DIAPERS MAKES SHORTING JAPANESE YEN THE TRADE OF THE CENTURY

by finansakrobat


The core to Japan and its future problems is embedded in its demographics.

In many developed countries, the average age of its population is rising. But nowhere is this happening as quick as in Japan. This was succinctly exemplified last May, when the Japanese diaper producer Unicharm said that soon they will be selling more adult diapers than regular diapers:

 

At Unicharm, said Takahara, who is also president, the adult diapers business is becoming increasingly important to the company.

“Domestic sales of diapers for the elderly are growing by double digits,” Takahara told reporters last month. “It’s an extremely important business in terms of both sales and profit margin.”

This story was largely ignored in May, but as hedge funds and banks started honing their sights on Japan this fall, the story resurfaced. It was Morgan Stanley that made many people, myself included, aware of the large demographic shift, in a presentation with the lovely title: “Shorting Japan is the trade of the decade. But which decade?”.

Other than a less than optimal demographic, there are three things you need to know about Japan’s economy; they have the worst looking balance sheet of any country (including Greece and Ireland), the country has been in deep financial trouble for a whole generation and somehow the economy has failed to blow up .

 

As I am writing this, Shinzo Abe has just won reelection. He first served only one year and is making his comeback on two issues: boosting the economy and nuclear energy.

 

When Abe left the position as prime minister,  due to “Crippling Diarrhea“, he was known as the worst prime minister since 1994 for Japanese bonds. Based on this, and the fact that he publically said he wants to make sure the Yen weakens, it could be a blessing for the Japanese export sector.

 

That’s probably the reason why the smartest investors in the world are betting heavly against Japan. Both the bonds and the Yen. But that could be great news for Japanese exporters.

Albeit Abe is walking a tight rope, since even a 2 percentage point increase in interest rates, could be enough to crush the Japanese economy. In theory.

The final thing you have to consider, is the way Japanese debt is structured. On the face of it, the country has a debt 195% of their GBP. Meaning the economy is almost half as small as the debt. But who are these creditors? 3 out of every 4 Yen owed, is to Japanese banks, individuals and institutions. That means that Japan has control over its creditors, which gives them significant leverage. (In contrast we can look at Greece, which has almost all of its creditors abroad and no control over its own currency).

Secondly if Abe manages to do what he has pledged to do, to destroy the value of the Yen through “unlimited easing”, the Japanese export sector could be in line for the biggest boost in history. If the value of the Yen drops 20%, that money hits Japanese companies straight on the bottom line. Instant profit.

Now finally we have to consider that investors have been betting against the Yen about once a year for the last four years. Massive losses have built up so far.

But this time, it could be different.

“The name is Bond. Japan Bond.” Abe returns as Agent .007 in “Yenwrecker”

I was reading an article today about how the return of former Prime Minister Shinzo Abe, now head of the LDP, as the new Prime Minister, could be absolutely devastating in terms of the value of Japanese bonds. Yes, I was actually reading a finance article. Not that I claim to fully understand it but then again, it’s not completely over my head either.

Here’s the first two paragraphs:

 

Bond Risk at Month High on Specter of Abe Spending: Japan Credit

 

Japan’s bond market is signaling concern that a government run by Shinzo Abe will ramp up spending to revive growth, adding to a debt burden already twice the size of the nation’s economy.

The cost to protect Japanese government bonds against nonpayment for five years rose every day last week, reaching 76 basis points, the highest level since Oct. 30, according to CMA prices compiled by Bloomberg. Contracts on U.S. Treasuries were at 37.5 basis points. Theextra yield that investors demand to hold 20-year JGBs instead of 10-year notes is hovering near a 13-year high, showing they are pricing in more long-term risk. for the rest of the article click here

 

So I was thinking, what would be the best way to explain my own sort of aversion to having Shinzo Abe return as PM other than the fiscal meltdown he might create. He is death for Japan Bonds. He is Bond. And then it occurred to me, that with his pro-nuclear policies, he might add another atomic meltdown to the fiscal meltdown or do both. So to fully explain my views on the guy, without taking the trouble to get to serious about it, because after all, Prime Ministers in Japan make fireflies look like turtles, I pondered what would happen if Shinzo Abe played Bond.  It might have seemed like a crazy notion a year ago, but the movie starts on December 16th. I can hardly wait.

Mr. Bond is back, more deadly than ever. No bank can resist him. He's licensed to kill...the Japanese economy. (Note "From Japan With Love" will be released in the US as YENWRECKER in January 2013)
Mr. Bond is back, more deadly than ever. No bank can resist him. He’s licensed to kill…the Japanese economy. (Note “From Japan With Love” will be released in the US as YENWRECKER in January 2013)