Debt and Demographics Will Weigh Down EWJ
Japan has the highest sovereign debts in the world, quickly approaching 250% of GDP. That’s well more than double the size of America’s debt load, and most of us consider the U.S. to be far too heavily indebted for its own good. And Japan shovels massive amounts of new debt onto the pile every year with budget deficits that have averaged 8% to 10% of GDP since 2008. In 2013, 46% of all government spending was financed with debt.
At the same time, Japan’s population is aging and shrinking. At the risk of oversimplifying, Japan’s debts continue to balloon even while the number of Japanese citizens available to pay it back gets smaller every year.
There is not realistic way out of this for Japan, which means major trouble for the EWJ in the long term. The Japanese bond market has been quiescent, and yields remain ridiculously low given the macro risk that Japan presents. The Japanese 10-year yields a pitiful 0.6% — more than two full percentage points below the U.S. 10-year Treasury. This has been made possible because the Bank of Japan buys 70% of all Japanese government bonds, though it has resulted in a weaker yen.
Still, if I am right about Japan eventually having a sovereign debt meltdown, the yen’s declines of the past years will look almost quaint. The yen will effectively fall to zero.
That will make paying back Japan’s mountains of debt a lot easier, of course. But it will cause ordinary Japanese citizens — and particular its pensioners — a lot of pain.
If you want to trade Japanese equities, be my guest. Any asset, no matter how fragile its fundamentals, can be a decent short-term trade. But the real play here — and the one that I view as almost “risk free” over a longer time horizon — is shorting the yen.
As always, use common sense when trading. You can be “right” about a short and still lose a lot of money if you get caught on the wrong side of a short squeeze. An ETF option to consider in lieu of shorting the yen directly would be the ProShares Ultrashort Yen (YCS).
But if you’re still considering the EWJ, I’d point you to a duffel bag and a zippo lighter.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.