Inside Japan's Stimulus Plan

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Includes: FXB, FXC, FXE, FXF, FXY, JYN, UDN
by: Ralph Shell

Prior to his promotion from finance to prime minister, Naoto Kan's chief economic concerns seemed to be fighting deflation, and assisting Japanese exporters, giving lip service to a weak yen which benefits their trade. Now Kan, apparently influenced by an Osaka economic professor, Yoshiyasu Ono, has changed his tact.

For years now, the aging Japanese population has chosen to save, resulting in a moribund domestic economy. A series of Japanese governments has embraced the Keynesian solution. If the private sector will not spend, do it for them. Decades of deficits now has the government's debt soaring to a hearty 200% of the GDP, making the Greeks look like pikers. With tax revenues reduced because of the recession, and now accounting for less than 50% of the yearly spending, somethings must be done.

The Japan Times suggests the direction the new government may be taking when they reported:

"In a recent interview, Ono said the government should increase taxes and use the revenue to create jobs in such high-potential sectors as nursing care, health care and environmental technology as the population grays, which would then help compensate for the drop in household income expected from the tax hike."

This indeed was the first step taken when the Bank of Japan reported $33B in money available to banks who are lending a wide variety of start up ventures. Granted $33B is not a lot of money to spark an economy, but if targeted to entrepreneurial start ups, the multiplier effect might be surprising. Economic growth would result, with additional tax revenue from the start up companies. A broad based tax is also scheduled to address the deficit.

Perhaps the market will award the new government in Japan with some kudos, perhaps a stronger yen, but the the results of macroeconomic change takes years to unfold, and there are unintended consequences. For example, will the Japan's interest rate remain at the current 1.24% with the potential return of brisk economic activity? And what would this do with the financing cost of the existing Japanese debt?

For the past six weeks the USD/JPY has been coiling into a triangle, getting ready for a move. Our vote last week, for a break to the downside, went unrewarded. There are many Japanese exporting companies whose profit can be enhanced by proper positioning in the yen, and you can be assured they have technicians studying the triangle chart pattern. Note what happened when the trend line was broken on March 24. This market, in the futures, is fairly even. A breakout in either direction should give us a nice move. We intend to watch carefully and go with a break out. (Click to enlarge)

Disclosure: Long FXC and FXA, short FXE