Japan is now running a current account deficit. Gone are the days of the Japanese Yen (JPY) and Government bond (JGB) markets being regarded as a "safe-haven". They are now the riskiest markets to be invested on the planet!
I have talked about Japan before on SeekingAlpha.com on numerous occasions. I have been fascinated at how the press of popular opinion have been and continue to refer to the JPY and JGBs as "safe-havens". Debt to GDP ratios and other fundamentals aside, I have argued that the press of popular opinion referring to these markets as "safe-havens" suggests that they are probably incredibly risky and inherently unstable. This is because when a security or market reaches the status of a "safe-haven" it is usually widely held by investors - and when a market is widely held where is the marginal buyer going to come from to push prices higher? I think this applies to the JPY and JGB market, yes counter to popular opinion these markets are inherently unstable because they are dominated by weak hands.
But markets that are inherently unstable can give the illusion of robustness until they reach a tipping point. For me the tipping point for Japan is the very reason why it was originally seen as a "safe-haven" destination - its current account surplus. For many years Japan's current account surplus has been the envy of the many sovereign nations. Japan has been a creditor nation. That has now come to an end. Japan is running a current account deficit and the data released on Thursday suggest that this is the greatest deficit in at least a generation. I wouldn't take this too seriously if the deficit was the result of a crisis such as the Global Financial Crisis (GFC) of 2008. But this is a little bit different, there seems to be a fundamental change in Japan's balance of payments.
What does all this mean for investors/traders? For those who want to focus on U.S. markets it means very little. However, for those adventurous types who look for investment opportunities globally it means that we now are likely to see significant depreciation in the JPY (upside in the USDJPY, EURJPY etc), this will result in inflation appearing in Japan, and Japanese nationals realizing a return of less than 1% for 10year JGBs is as stupid as buying Japanese stocks with P/Es close on 100 in 1989! Yes, I am aware that not many investors wont want to take a position in the JPY or in JGBs, but the good news is that you don't have to. The primary beneficiary of a collapse in the JPY and JGB market is the Japanese equity market.
So long may Japan continue to run trade deficits because holders of Japanese equities stand to gain considerably! I continue to believe, now with a good "deficit" reason, that the upside in Japanese equities over the coming months will surprise even the wildest optimists!