Is there one market that western macro investors just can’t seem to get right - its Japan. The only thing that is constant is that once they think they get it, they really don’t. For someone who used to live in Japan, I can say with 100% confidence, foreigners are always the last ones to get the memo. The closest I have ever come to being an insider was near the end of my high school exchange, and I have been playing with the basketball team for an two hours a day, during school term, and six hours a day during the summer. We had shed blood, sweat and tears together, when at the beginning of training one of my teammates mates came over to me and said “we are not talking to Tanaka today - he skipped training yesterday. Ok?” I said ok, and did not talk to Tanaka as instructed. I had mixed emotions - I felt sorry for Tanaka, but I was also pleased I have finally made it to the inside. If you have never heard of Japanese high school club training, “bukatsu”, perhaps watch some Japanese high school baseball videos on Youtube. Intense is the key word here. And team spirit is everything. Anyway, the key issue is never trust a foreigners view on Japan - they know nothing.
I remember in 1997, Steve Roach, a very famous economist for Morgan Stanley, was very bearish on JGBs. If memory serves, he called the 10 year JGB at 3%, the short of the century. They or course went to zero, or where the greatest long of the century. In fact short JGB trades destroyed so many hedge funds, it came to be known as the widowmaker trade.
Associated to this was Yen strengthening during times of US recession. Early 1990s and again after the GFC gave rise to Yen being seen at a “safe haven” currency.
I always felt this trade was easier to understand in terms of Korean Won. Macro traders often preferred Korean won to Japanese Yen as it had higher interest rates, and similar industrial structure. The Won/Yen carry trade was always popular with macro traders. Periods of Yen weakness against the Won tended to be followed by periods of Yen strength. The “macro community” has learnt from this, and have been pushing long Yen trades for a while now.
In recent days the US and Japanese government have intervened to strengthen Yen.
The macro community has started melting down again. Here is a couple of choice selections from Twitter.
Lee Roach seems to be pushing for a huge carry trade unwind (what is with people called Roach and Japan?!?) and Michael A. Gayed thoughts are not totally clear to me, but I do know he is “VERY EXCITED” about Yen moves.
What do I think? Well in the political world we live in I have a really simple view on Yen. I think it goes exactly where the government thinks it should go. Which basically means, they like it weak, but not too weak. Do I think we are going to be a catastrophic Yen carry trade unwind? Well the Japanese (who would know if this was going to happen) would be buying JGBS in that case. They did that in 2007. Today, not so much.
Do I think Yen is about to be catastrophically weak? Like an Argentinian Peso or Turkish Lira? I think you need to see Japanese interest rates ABOVE US rates and still weakening to really believe that. That may happen - and then we would have to consider that risk. But for the time being Japanese yield remain below US yields.
I think the simple story is Japan has inflation now, and is much more a “normal” country now. Why was it so special for so long? Japan challenged the US in the 1980s, so agreed to economic policies that hamstrung it for three decades. But now that China is the challenger, Japan is free to do as it pleases. And it chooses inflation. And we know, inflation is good equities and bad for bonds.
Personally I look at the above, and I am neither bullish or bearish on Yen. I am bearish on JGBs, but also bullish on Japanese equities. As a for “macro investors”, they are so much like the generals of old, always fighting the last war.
