There has been so much focus on China this last decade that the world has perhaps lost sight of developments in Japan. It is still the worlds' third largest economy and one of Australia's largest trading partners, especially for its commodities exports.
When I first visited Japan in the 1980's, real estate in Tokyo was the most expensive in the world. Two decades of deflation later, the present Japanese government and its central bank have embarked upon a massive program of money printing in an effort to stimulate inflation.
Change always creates opportunity for investors. Ask Kyle Bass and Richard Howard from Hayman Capital. Bass predicted the US sub-prime crisis and the European Sovereign debt explosion. They publicly predicted a "full blown bond (Japanese) bond crisis in the next few years". This arises from the threat of rising Japanese interest rates on sovereign debt consuming the "bulk of the nation's entire tax take". Hayman's view of Japan is cathartic.
That assumes the money printing instituted by Haruhiko Kuroda at the Japanese central bank does generate the required inflationary policy objective. It may not, as Ben Bernanke has found out in the United States. They can both control the supply of money, but they cannot control demand for it, or the velocity of its circulation. In the US, the velocity of circulation has been dropping - less activity for a quantum of money supply. That is one reason why the money printing to date in the US, UK, Europe has not resulted in inflation, or even inflationary expectations of consumers. Demand for money has dropped. Prices have deflated.
The same could occur in Japan. Hayman might be wrong, but keep an eye on its Japan Macro Opportunities Fund. That will give you some clues as to where Australia is going to head, both from a trade and an investment perspective.
Volatility in Japan could mean asset allocations to other countries, including Australia. That has implications for the relative value of the Australian dollar and its exports to its second largest trading partner.
Given the size of the Japanese money printing, a bet either way can have massive gains or losses at the fund and at the country level.
(You can find a full discussion at Australian Financial Review 11th May 2013 written by Jonathan Shapiro).
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