Currency Wars – Japan Turns Up Heat

This is getting really interesting.

Getting this right could provide some of the absolute best trade opportunities of 2013. I plan to take full advantage. Considering that I expect the coming year to be extremely difficult to trade (and a real minefield for those with little experience) focusing on “what works” will be essential for survival.

As I’d mentioned in a previous article, the dynamics surrounding the U.S Fed’s plans to “print their way out of debt” and the dynamics of Japan’s recent foray into the “monetary easing business” are very different – and well worth pointing out.

Bottomline – Japan’s public debt is predominantly domestically owned (95% is owned by Japan’s own citizens) while the U.S owes more than 50% of its debt to foreigners. Japan’s printing will have little ramifications (globally speaking) and essentially they can print forever – managing  this domestically, with almost no risk of default.

Sooner or later holders of  U.S debt are going to get extremely “choked” as the dollar denominated paper they own is driven into the ground…and worth less and less and less…….

A quick look at a long term weekly chart of the AUD/JPY.

Forex_Kong_Currency_Trading

The recent monetary policy shifts/ implications out of Japan are a game changer if you ask me – and will likely be cornerstone to my trading plans moving forward. Eventually (as well with consideration of “eventual” rising interest rates in America) the U.S game will come to an end. It’s gonna be messy, and it’s gonna be tricky to trade.

The Yen (at least for now) appears to have a much clearer path on its road to “devaluation” than the USD – as the currency wars are now really starting to heat up. Opportunity will be found shorting both, but the fundamentals suggest that the Yen may provide an easier path to profit.

Tactical Execution: How to Profit from Japan’s Devaluation Strategy

The Carry Trade Renaissance

Here’s where things get really juicy for experienced traders. Japan’s aggressive monetary expansion isn’t just creating a weaker yen – it’s resurrecting the carry trade on steroids. With Japanese interest rates pinned near zero indefinitely and other central banks eventually forced to raise rates, we’re looking at interest rate differentials that could stretch for years. The AUD/JPY setup I showed you is just the beginning. Look at NZD/JPY, CAD/JPY, even EUR/JPY once Europe gets its act together. These aren’t your typical short-term momentum plays – we’re talking about structural shifts that smart money will ride for months, possibly years.

The beauty of this setup is the asymmetric risk profile. Japan has explicitly stated they want inflation at 2% and a weaker currency to boost exports. They’re not fighting us – they’re practically begging us to short their currency. When was the last time you had a central bank literally telling you which direction to trade? This is why I’m structuring my entire 2013 strategy around yen weakness. The Bank of Japan is doing the heavy lifting for us.

Currency War Dynamics: Why Japan Wins This Race to the Bottom

Let me be crystal clear about something: not all money printing is created equal. The Federal Reserve is stuck in a box. Print too much, and foreign creditors start dumping Treasury bonds. Print too little, and the domestic economy stalls. Japan doesn’t have this problem. When you owe money to yourself, you control the entire equation. It’s like owing money to your left pocket instead of to your neighbor – completely different dynamics.

This gives Japan a massive tactical advantage in the currency wars. While the U.S. has to worry about China, Saudi Arabia, and other major Treasury holders getting nervous, Japan can print with impunity. They can credibly commit to currency debasement in a way that America simply cannot. This is why USD/JPY is setting up as one of the cleanest trending opportunities I’ve seen in years. The fundamentals are aligned, the technicals are breaking out, and the political will is there. That’s the trifecta every serious trader dreams about.

Risk Management in a Volatile Environment

Now, don’t mistake my conviction for recklessness. The coming year is going to be absolutely brutal for traders who don’t understand position sizing and risk management. We’re entering uncharted monetary territory, and that means volatility is going to be extreme. The yen pairs I’m targeting can move 200-300 pips in a session when the big algorithmic systems start unwinding positions.

Here’s how I’m structuring my approach: smaller position sizes than normal, wider stop losses to account for volatility, and pyramid entries on weakness rather than chasing breakouts. The AUD/JPY chart shows you the bigger picture, but execution is everything. I’m using the 50-day moving average as my trailing stop on longer-term positions and taking partial profits at major psychological levels. This isn’t about hitting home runs on every trade – it’s about consistently extracting profit from a multi-year structural trend.

The Endgame: What Happens When the Music Stops

Eventually, this whole monetary circus is going to end, and it’s not going to be pretty. The question isn’t whether the music will stop – it’s when, and who gets caught without a chair. My bet is that Japan’s domestic debt structure gives them more staying power than the U.S. system. When foreign holders of U.S. debt finally say “enough,” the dollar could collapse faster than most traders realize.

But here’s the thing – we don’t need to predict the exact timing of that crisis to profit from the current setup. The yen weakness trade has legs for at least 12-18 months, probably longer. By the time we get to the real crisis phase, smart traders will have already extracted massive profits from this currency devaluation cycle. The key is staying disciplined, managing risk properly, and not getting greedy when the trend starts to mature.

Focus on what works. Trade the trend until it breaks. And remember – in a world of competitive devaluation, the currency that falls the fastest often falls the furthest.