lets get this thread back on track now that my bet w/ Mr. Now is in losing position by a few cents
(still long way till december though)
next idea: long yen vs. dollar...this long term idea i think has reached a very attractive point. first the political issues. shinzo abe's govt has been suffering curruption, defection, suicides as a result of scandals. i believe there is room for constructive improvement on this front (very low conviction due to lack of expertise in this area)
next, we have the increased shareholder activism in a very traditionally pro management culture. the latter culture, however, isn't backed by business provisions since shareholders have the most power in japan than in (im pretty sure) any other country. they can directly vote on boards, executive pay and they have recently started to break away from their stoic following of management.
this makes japanese companies more attractive as shareholders get a bigger say in how they are run and a better opportunity to oust ineffective management. large shareholders have said they will vote to oust managers/boards that fail to reach a return on equity of 8% for any 3 year period.
now onto economics. then yen is at a very low point of about 123 to the dollar. this low yen (and the fact that it has been so low for so long) has contributed to the yen current account surplus and capital account deficit. locals sell the yen to gain higher returns elsewhere in both a carry trade (earning higher risk free rates of return) and as overall investments (in companies & other country's risky assets).
economic investment isn't as large as they can get if real investment in japan responds to the low yen. instead, income transfers jumped 41.7% in april to account for about 3 times the japanese surplus in goods and services. this is partly a direct result of japanese yen weakness (so income in yen terms from foreign investments become larger) and partly a result of the low interest rates available at home (so yield seekers invest elsewhere to gain while the yen stays low and calm). so if real investment in japan increases, the capital account would start to show larger foreign flows into japan. the yen is at a level where these real economic flows are becoming very attractive.
these can overwhelm carry traders & other "hot money."
right now, the market seems to think that the income transfer part of the CA is a small factor & that interest rate differentials are the tradable info. as long as JGBs stay low and the BOJ doesn't push up rates (to try to make sure deflation doesn't again rear its head), the yen will stay low.
it isn't likely to get much lower. in order for this to happen, the BOJ would have to actively start to intervene in the market, or the rate of flows out of japan would have to increase beyond the recent historical rate.
a rate of 125-135 would make real economic investments extremely attractive from a foreign standpoint and make japanese companies even cheaper than they are.
this ties back to the shareholder activism as the companies are less tied to management and shares are held more by hedge fund and foreign investors (this makes comapny takeovers less troublesome & faster so that investors could respond quicker to further drops in the yen).
other aspects of this trade include the fact that japan is a net importer of commodities, the fact that a large part of the current surplus comes from chinese & other asian countries' demand for japanese goods, and the fact that US dollar is fundamentally weak overall but bouyed vs. the yen as a result of higher relative yeilds (though not as much as AUS or NZD).
so i don't think the yen is likely to drop further, and the way these things tend to unwind, it would prove to be extremely profitable and fast. the last time the carry trade unwound, the yen popped from somewhere north of 160 to the dollar, down to 120 or so in VERY short order. a comparable drop would put us at a yen level of 90 vs. the 123 it is currently trading at (different time period obviously but it's an example of how the carry trade can unwind).
now i'm not saying the yen would jump to 90, but even a move to 110, or 105, or 100 would be a very nice profit. the risk here is fairly low as no likely (or even unlikely event) could push the yen much lower. further, even if it DID occur (and yen moved down to 135 or something), fundamental flows would likely see that as huge buying opportunities (depending on the event that caused the drop)
overall, i'd be very bullish the yen right now and i'd put the overall signal at about +80%
so thats it, any thoughts? questions? comments?
thanks,
Barron