“The following is taken largely from the newletter of John Mauldin”
After the collapse of what might still be the largest economic bubble in history, in 1989, Japan is still mired in a 24-year non-recovery. Nominal GDP in 2011 was almost exactly what it was 20 years earlier, in 1991. You can find other ways to measure nominal GDP which indicate limited growth; but compared to the US and China, nominal growth in Japan has been virtually non existent.
Japan’s gross debt to GDP ratio is expected to top 245 per cent this year, according to estimates by the International Monetary Fund – which is considered to be “ridiculously high”.
They cannot continue to grow their debt at the current rate. There is a limit. No one knows for sure what that is, but it is getting closer. And they know it. So they have to get their fiscal deficit below the growth rate of nominal GDP.
If JGB (Japanese Government Bonds) interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt. Even a 1% rise would be fiscally devastating.
The Abe government plans to raise taxes. Japan’s current sales tax is 5%, due to increase to 8% next year and 10% by 2015 with hopes of generating further revenues , but this will also hurt consumer spending. So round and round it goes.
The government of Japan has no choice. Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it may just bankrupt the financial system and quite possibly trigger hyper-inflation, and at this point – there is no turning back.
I’m watching this closely as my theory that the “EU Zone” would be our catalyst for “global fireworks ahead” may very well be replaced by Japan as this is developing extremely quickly.
I believe the “easy money” short JPY is now gone, and am currently positioned “long JPY”.
Nice call Kong! The Nikkei is down a wopping -2,500 points since your post : https://forexkong.com/2013/05/25/nikkei-20-year-chart-rejection/
The JPY Reversal: Why Smart Money is Positioning Long
Technical Confluence Supporting the Yen’s Bottom
The JPY’s structural reversal isn’t just fundamental—it’s technically screaming at us. Look at USD/JPY hitting multi-decade resistance near 125.00, a level that’s rejected price action consistently since the Plaza Accord dynamics shifted global currency flows. The weekly RSI showed extreme overbought conditions for months, while the monthly chart displayed clear divergence between price and momentum. When you combine this with the BOJ’s inevitable policy pivot, you get a recipe for massive unwinding of carry trades that have dominated flows for years.
Smart money has been quietly accumulating JPY across multiple pairs. EUR/JPY’s rejection at 140.00 was particularly telling—European banks have been massive JPY shorts, using the yen as funding currency for their peripheral bond plays. That trade is now toxic. GBP/JPY’s failure to hold above 170.00 confirms the broader theme. These aren’t random technical levels—they’re structural points where decades of central bank intervention and carry trade flows converge.
The Carry Trade Unwind Accelerates
Here’s what most retail traders miss: the JPY carry trade isn’t just about Japan. It’s the foundation of global risk appetite. When hedge funds and institutions borrowed yen at near-zero rates to buy everything from Australian bonds to emerging market equities, they created a web of interconnected positions that dwarf Japan’s domestic economy. The unwind of these positions creates forced buying of JPY regardless of Japan’s internal economic situation.
AUD/JPY dropping below 90.00 signals the commodity carry trade is dead. NZD/JPY’s collapse through 85.00 confirms it. These currency pairs served as proxies for global growth expectations, funded by cheap yen. Now that growth is slowing globally while Japan’s relative position improves through lower energy imports and manufacturing reshoring, the entire thesis reverses. The yen becomes a haven again, not just a funding currency.
Policy Divergence Creates Opportunity
The Federal Reserve’s aggressive tightening cycle creates an interesting dynamic with BOJ policy. While the Fed fights inflation with rate hikes, Japan’s inflation remains structurally low due to demographics and productivity gains. This divergence typically favors the dollar, but we’re reaching limits. USD/JPY above 140.00 triggers intervention from the MOF—they’ve made this crystal clear. More importantly, real interest rate differentials are compressing as US inflation stays elevated while Japanese inflation moderates.
Central bank intervention isn’t just about verbal threats anymore. Japan’s foreign exchange reserves are massive, and they’re prepared to use them. The MOF’s recent operations weren’t just warning shots—they were testing market depth and establishing price levels where they’ll defend the yen aggressively. When a central bank with unlimited domestic currency printing capability decides to defend a level, betting against them becomes extremely expensive.
Positioning for the Long JPY Trade
The mechanics of this trade require precision. Simply buying JPY against the dollar might work, but the real money is in cross-currency opportunities. EUR/JPY offers excellent risk-reward as the European Central Bank faces its own crisis with peripheral bond spreads widening and energy costs crushing competitiveness. The European economy’s dependence on Russian energy makes it structurally weaker than Japan’s pivot toward energy independence.
GBP/JPY presents another compelling short opportunity. The UK’s current account deficit and political instability contrast sharply with Japan’s improving external balance and stable governance. More importantly, the Bank of England’s hiking cycle is approaching its terminal rate while the BOJ maintains policy flexibility. This creates a convergence trade that could deliver significant returns as rate differentials compress.
Risk management remains crucial. Use JPY strength against commodity currencies like AUD and CAD as hedge positions. These pairs offer better technical entry points and align with the broader theme of carry trade unwinding. The key is patience—this reversal took years to develop and won’t resolve in weeks. Position sizing should reflect the long-term nature of this structural shift while maintaining flexibility for short-term volatility that intervention operations will inevitably create.
It is appropriate to credit John Mauldin in this blog post, given 80% of this text is copied from his newsletter of 25 May.
100% totally and absolutely!
Thanks John!
As well…..please see the updated blog post with credit – fantastic info.
Just curious ( as per your “handle” ) – are you employed for such search/copy work?
I could also use a bit of the same “watch dogging”!
Nope, just a regular reader. I noticed the writing style was different to your usual blog posts, and then a few seconds later remembered reading some of the sentences in JM’s newsletter.
Re hiring a watch-dog – have you tried one of the outsourcing websites like odesk or elance? I’m sure you could get someone to look around the net for you for, like, $1 an hour!
Yes sometime on the weekend I’ll give readers some “other / extra ” info as opposed to my usual “rants”.
I can’t research every single thing I’m interested in to the degree that I’d like.
Have a good one.
Hi Kong, Mauldin Fan, and all readers, [Please see below for a question for Kong]
Thanks for tossing one to JM. ( But don’t forget old Dev, the source for the source. I am a simple man but as vain as the rest. )
JM does an excellent job of garnering info and opinions from great minds. David Kotok does too. They often disagree but the levels of input are outstanding and are FREE. Folks with a bit of savvy can take the free info and adapt it to their own investing and trading.
Kong, please elaborate on the idea that long JPY is the way to be. It may seem counter intuitive for some of us.
Japan is in dire straits and bound to get worse as JM and you posited. The Nikkei has taken a hit.
Why should the Yen get stronger? Is it simply the higher interest rates that the Japanese will have to pay?
When there is blood in the streets the coin of the realm goes up?!
I’m thinking of the GBP / Soros days when the Brits were trying to defend Sterling while their economy was tanking.
GS believed it was unsustainable and made history by shorting GBP.
(Maybe Paul Tudor Jones took the idea to GS?)
Finally and again, I enjoy your blog and posts immensely. The level of discourse and clarity here is light years ahead of virtually every FX and trading forum known to myself and probably the masses. If there is a good one, please let me know.
Bye for now and a great weekend to all,
Devil Yell
Devil – Thank you for your kind words. I so appreciate it.
Ok – Yen strength ( under any circumstances ) must sound like lunacy….as we would generally consider ” weak economy = weak currency” as a broad stroke “underlaying fundamental” as far as currencies go – right? Right.
Japan is hooped…therefore it should only make equal sense that the currency is “equally hooped” right?
WRONG. (he he he…..)
In my view – Japan is quite unique in that the vast majority of their public debt (bonds etc) is owned domestically as opposed to the U.S where considerable debt obligations are “foreign”. ( who’s yer daddy U.S.A? – oh ya…..China baby).
The risk of “default” from Japan is relatively limited in that ( worst case scenario ) they default – but for the most part this “default” only effects their own population as the majority of debt is held by their own citizens. UNLIKE THE U.S where default would have massive and catastrophic global implications.
From a political standpoint Japan is unlikely to turn it’s back on it’s own people ( culturally as well ) so…..safety is seen as they can literally “print forever” with limited global implications ( as opposed to the U.S where interest rates inevitabely MUST RISE )
As well…..since Japan is able to keep its base interest rates near “0” forever ( as it really only effect those domestically ) the currency remains “lowest on the totem pole” and is used for “carry trade” by nearly every major bank on the planet ( where JPY is sold..and in turn investments are bought in higher yielding environments such as Australia for example). – for your own interests please google “carry trade”.
Now……in time of “fear” or “risk off” massive flows of money must be converted back to JPY as investors seek safety, and “unwind” their higher risk investments in other countries (AUD /JPY for example)….so JPY (no matter what they want at the given time) shoots for the moon on massive repatriation of funds in time of risk off / fear.
Please use the search function here at the blog Dev – as I’ve written several detailed posts on this.
That’s off the top of my head…please let me know if you need more info.
As well as a near term factor……..
Imagine all the money that has recently poured into Japanese stocks.
When these stocks are sold ( aggressively ) what currency are they first settled in?
stocks down = currency up in this case.
Any culture that invents square water melons is OK in my book. First profit target is 40 000 #Nikkei
I’m with you on the water melons and a pile of other amazing things “Japanese”….but we’ve still got considerable room to fall here in the short term.
Yes im mostly in scalp mode but looking to build a position when the time is right.
Tell me about it – this is like pulling teeth here, as things continue day to day to just grind, grind, grind.
It really makes you appreciate the “good times” when something actually trends (like JPY for months!) more than a day er two in a row!