Ryan Cole, The Investment U Research Team
Bet against Japan.
It pains me to say it. I lived in Japan for five years – great years. I love the country, I love the people, I love the cherry blossoms in spring and the festivals in the streets and the poetic dewdrop in my window each morning.
But right now, I hate Japan’s economy. Here’s why:
1. It’s an exporting country, and nobody’s buying.
The American savings rate has gone from 0 to around 5%, and it’s still rising. Remember, this is with U.S. unemployment hovering just under 10%, officially. And, with furloughs and cost-cutting measures, the average work-week for the “fully employed” has fallen to 33 hours – the lowest number on record. So a 5% savings rate of a markedly smaller income pie, equals the collapse of disposable income spending.
That fact can be seen in the U.S. trade deficit – which was only $25.96 billion in May, the lowest number since 1999 (and less than half the deficit at its peak). That entire imbalance could be erased if we stopped buying foreign oil – but that’s not happening anytime soon. Instead, Americans are delaying purchases of things like LCDs, new appliances, new cars – all the things Japan sells us.
Of course, China became Japan’s largest trade partner during the past decade – passing the U.S. for good in 2007. But China simply doesn’t have the demand to buoy Japan’s flagging exports. In fact, China is closing factories, and the long migration of countyside peasants to the cities – and middle-class status – has reversed. Young workers who’ve lost their jobs are returning to their ancestral homes, where rent is cheap or free. They aren’t buying Blu-Ray players or new TVs anymore – at least, certainly not Japan’s expensive name brands.
2. The economy hasn’t been healthy for years
By now, most know that Japan’s ‘lost decade’ never really ended. They’ve been talking about ‘green shoots’ for years, but Japan’s GDP growth has, in truth, just been sputtering along, occasionally growing by up to 3%, but usually flat or contracting.
Japan isn’t like the outside world imagines. There are tent cities set up throughout Osaka, the industrial capitol. Thousands live in makeshift huts under bridges in western Japan. This despite the fact that, contrary to popular belief, rents in cities like Kyoto are cheaper than in American equivalents like Boston (Tokyo is another world). And despite the fact Japan has low unemployment (5.2%). Japan is sick.
The IMF recently projected Japan’s GDP to sink 6% this year. Instead, Japan’s GDP shrank at a 14.2% annual rate in the first quarter of 2009.
There are a number of government programs attempting to stimulate consumption, and some are showing modest results. A tax rebate of $125, and economic encouragement for consumers to buy newer, more energy efficient products, both have brought on a bit of spending.
Meanwhile, factories are increasing production slightly, in hopes that some of China’s $586 billion stimulus will find its way to Japanese companies.
But those are exactly the sort of ‘green shoots’ that have been leading economists astray for years. Don’t be fooled – Japan went through its housing bust 20 years ago, and still hasn’t fully recovered, today.
3. Japan’s a fiscal mess
Many economists worry that the U.S. debt will soon reach 100% of GDP, perhaps as soon as 2010. 100% is one of those magic economic numbers – not only is it nice and round, but at that level, interest payments become a crushing burden. It’s hard to afford anything beyond the servicing of the debt.
In Japan, government debt is over 200%. It will be around 225% by the end of next year. The central bank has long been paralyzed – with interest rates reduced to 0% many years ago, and every trick tried and failed already.
The government has cast about for some good response to the current crisis, and come up empty. That, in large part, is the reason Japan is now going through a political crisis.
4. Who’s the Leader?
Last week, Japan’s embattled Prime Minister, Taro Aso, received a stunning blow. His party, the LDP – the ruling party of Japan for the past 50 years, save a few months in the ‘90s – lost local Tokyo elections badly.
They’d held the majority in Tokyo for 40 years. No one expected this result – and it’s being viewed as a condemnation of Aso and his party.
Amid calls for his head from enemies and allies alike, the gaffe-prone Aso has dissolved the Japanese parliament and called for elections on August 30. Should he lose – and, with 20% approval ratings, he just might, despite the formidable strength of the LDP – Japan will see new leadership for the first time in nearly a decade. And, again, that brief interlude in the ‘90s hardly counts.
If there’s one thing the markets hate, it’s uncertainty. And this election is the most uncertain Japan has seen in a very long time.
Add everything together, and you’ve got a country that has a rough few months in front of it, if not years. My recommendation – short Japan through August. I recommend the Proshares Ultrashort MSCI Japan Index (NYSE: EWV), which moves at twice the inverse of the regular MSCI Japan index.
After the election, the green shoots and positive news may make opinion – especially if the DPJ carries the day and institutes a variety of social programs. I’d exit the position before then. But for the time being, a global recession, depressed sales, crushing debt, and political uncertainty should be enough to guarantee Japan’s indices suffer.
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