Signs of an Impending Japanese Crash Abound

If you are optimistic about Japan, maybe you want to read the opposite view.

We stick with our "Strong Sell" on the Japanese market - despite current euphoria.

Markets were in denial for nearly two years concerning the extent of Fed Funds hikes. So when we went out on a limb back in June 2004 warning of Fed Funds reaching "around 6% around 2006" we got courteous giggles. And when the market finally accepted this reality in May, those giggles turned to worries.

A similar denial mode is brewing regarding Japan. The optimists reckon with growth as far as one can see. We reckon with a nasty shock - one that is triggered once the market moves out of denial.

Here are some scarier facts that optimists at least may wish to heed:

* Base money, the "dough" out of which money supplies are made, is contracting sharply, implying less liquidity.
* The last time that the Bank of Japan raised its overnight rate, 17th August 2000, the economy and thus market tanked.
* The last two times that the government raised consumption tax - it was introduced in 1989 and raised in April 1997 - the economy and thus market tanked.

Here is a gloomy outlook:

* Mr. Kaoru Yosano, Minister for Economic and Fiscal Policy, reckons that once Mr. Koizumi is replaced this September, Japan's will to reform will ebb. Markets won't like that.
* Mr. Sadakazu Tanigaki, Finance Minister, wants to double the consumption tax, bringing it up to 10%.
* The probable new PM, Mr. Shinzo Abe, wants Japan to flex its military muscles more especially concerning North Korea. That worries us civilians, and of course begets even more defence spending.

How can an economy and thus profits thrive in an atmosphere of higher rates, much higher taxes and a military threat? Look at how the Middle East is unnerving markets! Watch Japan's Economic Time ™ deteriorate, hurting markets worldwide.

Money-saving implication: Avoid Japan!

Editor's note: Funds/ETFs covering Japan include EWJ, ITF, JEQ and JOF.

Comments

[Steven Towns:]

Enzio -- Wow! I have to say I am a bit surprised by your pessimism towards Japan. Granted the situation is unsettled politically, but I wouldn't say a crash is imminent or that a crash will happen at all. If your forecast is correct I think anyone with equity positions is in for some trouble. One must either get very defensive in the sense of both noncyclicals and military-related or simply get into cash. I know you have been mostly optimistic on Japan to-date but I guess the combination of all the factors you listed above represents too much risk.

I'd like to say that I don't see the BoJ as being responsible for a crash this time around. They've already come out and said consecutive rate hikes are not planned and the economic data supports their positive view of the economy.

A possible consumption tax rate hike is more worrisome but I just don't see Tanigaki (1) becoming PM or (2) influencing a doubling of the tax to 10%.

Despite Abe's more hawkish stance politically as compared to Tanigaki, I don't think this worries Japanese citizens as much since Koizumi has held his ground and overall a stronger leader is preferred to what's perceived to be a "weaker" leader in foreign affairs.

I do in fact have concerns about Japan but remain optimistic. See my latest post (click here) in which I discuss the current earnings season and those concerns.

2006 Jul 28 10:07 AM