While The World Watches Fiscal Cliff, Shinzo Abe Creates Fiscal Disaster In Japan

Includes: FXY, YCL, YCS
by: Elite E Services

The Yen is down 12% against the U.S. Dollar since September. While most are watching the fiscal cliff situation in Washington, Shinzo Abe is creating a fiscal canyon in Japan. Shinzo Abe has been elected with an effective platform of devaluing the Yen.

In Japan, the new prime minister, Shinzo Abe, was put into office on a platform that was primarily based upon forcing the Bank of Japan to ramp up its stimulus efforts, indeed to run what amounts to unlimited easing until inflation hits a certain point (2%, in this case).

While for many investors this may seem irrelevant (unless you trade and invest in the Yen), in fact, it can have a big impact on world markets. A Yen devaluation can also have a big effect on the U.S. Dollar. While the Yen isn't exactly the Euro, it's still a major G8 currency and one of the world's biggest markets. Before China emerged, Japan was one of the U.S. biggest Asian partners. Japan's GDP is about $4.5 Trillion. Just to drop a few names we'll mention Panasonic (PC), Toyota (NYSE:TM), Sony (NYSE:SNE), Nintendo (OTCPK:NTDOY), Honda (NYSE:HMC), Mitsubishi (OTCPK:MMTOF), and many others.

What has been a building theme for some time, central bank intervention in the markets, is going to go into overdrive in 2013, with the brewing currency war among the major central banks as each tries to devalue its way to prosperity. But don't blame central bankers (at least not completely). Political leaders deserve a big dollop of the blame as well.

About the Yen

It looks like for the time being, the Yen will continue its decline. However, this irrational policy cannot continue, so it will not last forever. At some point, the reality of the markets will overwhelm the central bank policy. A market intervention is always more powerful than a central bank intervention. If you had asked any Forex trader if the USD/JPY would be 85 this week they would have said no. Like with many trends, stops were hit and speculators got on the short JPY bandwagon. And for many it's been a great trade. But it cannot continue.

Another strange factor about this trade is that across the board, the USD has been declining, but against the JPY it's up. That is another good signal for reversal.

Another factor - Fiscal Cliff

Another situation affecting this trade is what will happen with the fiscal cliff. Part of the reason USD has been declining is based on the global market uncertainty about the fiscal cliff. Any positive news about it may create a situation where the USD will reverse. This can severely impact the Yen because what's going on with the Yen is localized. We can see a lot of volatility in the USD based on any news that comes out about the fiscal cliff.

Most recently, South Carolina Senator Lindsay Graham says we're going over the cliff. Others say there is a major setback.

Specific Trade short USD/JPY

To capitalize on this potential reversal, short USD/JPY. This means you will be selling US Dollars and buying Japanese Yen. Even if the BOJ continues their policy, the recent rise in the rate of USD/JPY should have some reprieve.

To trade the USD/JPY you can buy or sell Yen ETFs. Yen double long (NYSEARCA:YCL) Yen double short (NYSEARCA:YCS) which are both leveraged. Japanese Yen direct is (NYSEARCA:FXY).

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The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.