Monday, January 31, 2011

Yen Headed South
Joe El Rady

Imagine for a moment, the world's worst managed economy: the bleakest outlook, lowest yielding currency and a debt to GDP ratio (not kidding about this) approaching 200% of GDP... ahh... Japan! Now imagined for a moment that this country boasts the world's strongest bond and currency markets, even given its government's attempts to sink them (the Japanese government must keep the yen under control in order to maintain export levels). No more imagining necessary, this is an unsustainable situation.

I'm not reacting, knee-jerk style, to S&P's recent downgrade of Japanese sovereign debt from AA to AA-. If you know me well, you've heard me declare many times about the unsustainable fiscal situation in Japan. But I've never felt as much immediacy and dread as I do now.

The clock continues to tick and I can feel a serious punishment coming to Japan from global bond market investors. With all the attention focused on Europe's shortcomings, investors seem to have forgotten Japan's disaster in the making. Really, the clock ticks faster and faster towards a time when Japans ridiculous 1.2% ten year bond yields will be history. For my part, I'm considering shorting the Yen.