There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.
— John Maynard Keynes
A fall from grace
At one point in the late 1980s, there was a square block of real estate in downtown Tokyo, near the Imperial Palace, that was worth more than all of California.
The country was booming…
The Japanese led the world in electronics. Every teenager had to own a Sony Walkman. The Toyota Supra and four wheel drive pickup were the two bests car of the decade.
Japanese investors bought up American icons like Rockefeller Center, Columbia Pictures, and the Pebble Beach Golf Course.
Along the way, Japan also created the 100-year mortgage and had an unassailable cadre of elites that ran the banks, the government, and the corporations. The country was run by one political party — the Liberal Democratic Party — from 1955 to 2009.
This political party’s main platform was “spend money and create growth.”
It tried stimulus after stimulus… They’ve built bridges in mountainous villages where few people live… They’ve forced banks to take on massive debt, and shuffled other debt to different banks.
And after twenty years of spending, Japan has $9.7 trillion in public debt — twice its GDP in 2009. They still have no growth.
A few months ago, in the thick of the Greece debt crisis, the Prime Minister warned the Japanese Parliament, “It is difficult to sustain a policy that relies too heavily on issuing debt. As we have seen with the financial confusion in the European Community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone.”
Japan has been in a deflationary spiral for 20 years.
The nation’s housing bust has still not hit bottom.
People hold onto money because they know what they want to buy will be cheaper later.
Core consumer prices fell 1.0 percent in August, marking 18 consecutive months of decline.
And to top it off, they just aren’t making any more Japanese. Check out the population pyramid:
As you can see during the “Economic Miracle” period from 1950 to 1990, Japan was youthful, ambitious, and full of vigor.
Despite what economists would have you believe, it still takes people to make stuff.
Right now, the birth rate in Japan is 1.34 — well below the replacement level.
Furthermore, Japanese culture isn’t accommodating to foreign immigration. The fact is that Japan’s workforce is shrinking at the same time its population of retirees is growing.
And to add to our Japan bashing, I give you the Nikkei 225 Index:
After hitting 40,000 in 1990, the NI225 has been one dead cat bounce after another. It’s looking like it might bottom around 5,000.
The Bank of Japan forecast its economy would grow 2.6 percent in the fiscal year to March 2011, and 1.9 percent the following year.
The yet the yen goes up
With everything seemingly going against Japan, why is it that their currency is going through the roof?
Below is the U.S. dollar/Japanese yen conversion chart.
I like to flip currency charts over in my mind to get a good idea of them. The drop means that you can buy more dollars with your yen. In other words, the yen has gone up 13 points in three months. (Note the doji at the bottom of the trend.)
That’s a huge deal in currency markets, and Japanese exporters like Toyota don’t like it — the higher yen makes exports expensive.
President of Toyota Motors Akio Toyoda recently said, “Toyota Motor Corp (TM) is not considering hastily shifting production overseas despite the yen’s strengthening against the dollar.”
The automaker went on to say, “Theoretically speaking, Toyota cannot afford to compete with its rivals.”
This was a clear shot at the government to do something about the yen…
A large group of legislators from the Democratic Party of Japan said the central bank “should carry out drastic monetary easing.”
Taking the hint, the government is starting to act. Japan’s central bank has launched a 5 trillion yen (or USD$60 billion) effort to buy a wide range of debt — including government bonds, corporate IOUs, and real estate investment trust funds, among others. This is just the first step in Japan’s quantitative easing.
It is obvious that Japan has taken the worst hit as the rest of the world goes into a currency war. Japan understands this, and will attempt to reverse the cycle by destroying its own currency and creating inflation.
The obvious trade here is to short the yen.
Short the yen
Buy ProShares UltraShort Yen (YCS).
This is an ETF that seeks to replicate (net of expenses) twice the inverse performance of the JPY/USD daily price change.
In other words, if the yen goes down, your investment goes up twice as much.
If this is too confusing, think of it this way: The entire world — with the exception of China — is hell-bent on destroying their own currencies in an effort to inflate away debt and increase exports.
This means that things that have inherent value will go up, especially in dollar terms.