People talk of bubbles in stocks and commodities of various shapes, sizes and descriptions. But I think the mother of all bubbles lies in the Japanese yen. Just how the Japanese have got away with running up a debt to GDP ratio of over 200% (higher than the PIIGS and the U.S.) is beyond me. Perhaps equally beyond my comprehension is how rating agencies have not said anything to date. Well perhaps I should not be surprised given how they react after a crisis has occurred.
I guess the Japanese have managed to get away with their debt to GDP levels for the time being because they have been able to run a trade surplus. But for how long can that continue given the strength of the yen? The yen's strength is making Japanese exports less competitive so that surplus may well change to deficit sooner rather than later.
In any event there is something else which is far more sinister than trade surplus/deficits and that is the means by which the deficits have been financed to date. In essence they are financed by the high savings rate of Japanese citizens. This is all well and good providing that the savings pool remains in place. But the aging of the Japanese population has led to the plug being pulled on the savings pool. Once you get to a certain age you tend to become consumers of capital rather than savers thereof. Thus in order to continue to finance the debt the Japanese government will need to turn to external sources, and the cost external debt is rising rapidly (the rise in U.S. 10-year yields is not an isolated thing). But Japan can ill afford to pay higher financing rates as currently it has to borrow 50% of its GDP just to finance its deficit.
Clearly something has got to give and I think that it will be the yen. Now I keep going back to fundamentals - you want to be long those currencies of counties that are fiscally responsible and short those that have been irresponsible. One glaringly obvious deep value situation I can see is with the NOKJPY cross. Have the growth prospects of Norway not improved following the financial crisis of 2008? I find that hard to believe given how crude oil has clawed back is losses (crude exports accounts for about 35% of Norway's exports). Take a look at how well the NOKJPY correlated to crude over the last 10 years and notice the big divergence that has occurred as of late.
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Also take note how well Norwegian equity markets have improved following the crisis. Clearly if the Norwegian economy wasn't in good shape then its equity market shouldn't have been one of the better performing of developed markets over the last two years.
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It does look as if the NOKJPY is in the process of hammering out a bottom. A break above 14.40 would confirm a breakout and then it would likely make up for lost time.
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Of course the behavior of the NOKJPY isn't so unique, take a look at other crosses such as the KRW, THB, BRL, RUB, AUD, CAD, and ZAR /JPY. They are all behaving in the same manner. Pay particular attention to the KRWJPY - it appears as if someone is trying to keep the yen crosses down. I have been in this game long enough to smell the vapors of manipulation. In any event you cannot keep the lid on a boiling pot for ever, for the longer you do the greater the intensity of the breakout.
Disclosure: I am long NORW. Additional disclosure: Long NOKJPY Currency Spot
