Those who have tried shorting the yen (NYSEARCA:FXY) over the past few years, and I include myself in this category, have not had good results: Since July of 2007, the yen has appreciated over 34% against the U.S. dollar. The chart below illustrates.
However, the case that the yen is overvalued and due for a monumental correction is only growing stronger, in my opinion. The rationale is simple: Japan's debt problem is perhaps the biggest in the world - bigger than the eurozone, the U.K., and the U.S. The infographic below, courtesy of Glassman Wealth, illustrates.
To further put things in perspective, Japan is running twin deficits: Both a budget deficit and a trade deficit - the latter of which reached a record high as Japan's energy imports grew due to the Fukushima disaster. Twin deficits have contributed to the decline of the U.S. dollar over the past 11 years. They signal a currency that is increasingly experiencing lower degrees of utilization.
One contrary argument is that Japan funds its debt from the savings of its own people. Because this debt is internally funded, there is much less of a risk of hyperinflation in the near term, while sustained deflation is more likely. Similarly, the United States was able to run large deficits and build up its national debt while maintaining the value of the U.S. dollar (NYSEARCA:UUP) during the 1980s when its debt was being purchased largely by U.S. natives.
However, it is unclear how long Japan can maintain this situation; opinions vary drastically. Moreover, the company's aging population creates a scenario where fiscal deficits could continue to rise as tax revenue and industry decline while various forms of social security spending increases.
Personally, I believe the onset of a record trade deficit is a huge signal that cannot be ignored, and that it may create imminent opportunities in shorting the yen. Coming from the forex world, I favor playing short opportunities in the yen against currencies whose economies are largely associated with the production of natural resource commodities. Specifically, this means the Canadian dollar (NYSEARCA:FXC) and the Australian dollar (NYSEARCA:FXA). A panic flight out of the yen, the kind characteristic of debt-driven hyper-inflationary implosions in which confidence in a currency is entirely lost, sets the stage for outstanding returns for investors who time the trade correctly.
Additional disclosure: I may initiate positions in the Australian dollar and the Japanese yen in the forex market; I currently hold a long position in the Canadian dollar against the U.S. dollar.