On The Path To Abenomics, Yen To Drop

Includes: FXY, YCS
by: Profit Fan

There were few surprises yesterday when Japanese Prime Minister Shinzo Abe nominated Hauhiko Kuroda for the position of Governor of the Bank of Japan. Abe has been advocating for a stimulus package powerful enough to lift Japan out of its deflationary rut by printing more Yen to inflate prices. Up until now, there has been continued speculation on Wednesday's announcement as the head of the Bank of Japan ultimately holds the keys to the Yen's printing presses; which in turn will determine how aggressive the Prime Minister can begin to inflate prices. Shinzo Abe is hoping that through inflated prices, a weakened Yen will help drive exports and generate much needed money for Japan. Since Abe's appointment, the Yen has risen from 77 JPY/USD lows in October to where it sits at approximately 92 JPY/USD today.

Some of the major problems Japan is facing are as follows:

1. Japan's ratio of government debt to gross domestic product, now at approximately 230%, is by far one of the highest in the world and growing.

2. Just recently, Japan's current account deficit turned negative, something that hasn't happened since the 1980's and only adds to the debt-to-GDP ratio.

3. Government tax revenue is approximately equal to interest on government debt and social security, leaving nothing for other programs, improvements or even debt reductions.

4. Political instability: six prime ministers in the past five years.

5. Nuclear energy plant closures have dropped domestic energy production and forced Japan to resort to importing energy from its neighbors at a time when the Yen's devaluation has driven up prices... with more to come.

With these mounting monetary issues, it's hard not to think that any actions Prime Minister Shinzo Abe takes are a little too late. Having to rely solely on exports at a time when the current account surplus has turned into a current account deficit should only be seen as a Hail Mary.

Only time will tell how much lower the Yen will go.

Ways to profit from a weakening Yen:

1. Going long YCS, which tracks double inverse to the Japan yen, is probably the safest of the bets out there. You can hold it as long as you would like and since none of the economics out there indicate any strengthening of the Yen, downside could be seen as somewhat protected.

2. A little less risky would be buying long (2 year) puts for FXY. I put this above option three below on the risky side because you can buy two year options; number three below only allows for up to six month long bets.

3. Buy YCS Calls. Again, these can't be purchased that far in the future, so risk / reward here is the highest. There is no real telling how fast or how far the Yen will fall.

As always, good luck, and please don't gamble with what you can't afford to lose.

Disclosure: I am long YCS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also have YCS Calls and FXY Puts.

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