A Guide to Profiting from the Coming Japanese Financial Tsunami

A Guide to Profiting from the Coming Japanese Financial Tsunami INTRODUCTION In a world now drowning in government debt obligations. We at Capitalist Exploits have no crystal ball. www. and home to the second largest bond market in the world.at 2 . and we offer only our opinion on the matter. In this report we will examine the rationale of our thinking. It is our contention that a social mood change reminiscent of that which has gripped European countries will be the tipping point that fundamentally and irrevocably causes a panic out of Japanese Government Bonds (JGB’s). Japan stands out as the most indebted government on the planet. The ramifications of this taking place are difficult to imagine.capitalistexploits. as well as that of two industry professionals whose opinions we value. Japan is the world’s third largest economy having only recently been eclipsed by China. We’ll also provide some ideas on how the small investor can participate in what we believe will be a wildly profitable trade.

As John Maynard Keynes stated. and with good reason. Many a hedge fund manager has been handing checks to the Bank of Japan for the last two decades. “The market can remain irrational longer than you can remain solvent.”   www.capitalistexploits.A Guide to Profiting from the Coming Japanese Financial Tsunami The “widow maker” Betting against Japan’s debt market has been labeled the “widow maker” trade.at 3 . As you can see from the graph above the Japanese debt markets have seemingly defied gravity for over 20 years.

while those that have been shorting the Yen have suffered horrendous losses. one not backed up by the data.at 4 . Japan is a nation of savers. even if “staying home” with ones capital no longer makes fundamental sense. A deflationary environment where all asset classes excepting JGB’s have fallen for over 2 decades has lured Japanese citizens and institutions into the “safety” of government bonds. and considered by many. the European debt crisis has aided in sending Japanese investors scurrying home to the “safety” of their own sovereign debt markets. Lemmings would be excused from such behavior. humans should not. 3)  Japan is arguably the most homogeneous society on this ball of dirt. Borrowing dollars and investing it in Yen has been very profitable. 2)  Equally importantly. www.A Guide to Profiting from the Coming Japanese Financial Tsunami Above is a chart of the USD/JPY relationship since 2001. A false sense of security exists in this market.capitalistexploits. Hedge fund managers who have been long the Yen itself have been enjoying a wonderful decade. The immense savings of both citizens and corporations has been funneled back into the Japanese Government bond market. “Staying home” is something that comes naturally to the Japanese. How has Japan managed what to many seemed to be the impossible? We believe there are 3 main reasons: 1)  Unlike most other major economies Japan finances it’s deficits internally. Fully 96% of JGB’s are domestically held. In many eyes JGB’s are a safe haven. In short the Japanese savings pool has been funding the growth of this beast. the most xenophobic. Additionally.

9 trillion) in new bonds. or that which is required to be rolled over.at 5 .Fully 60% of current JGB inventory will need to be rolled over in the next 5 years. Paying off this debt is not an option. long time. Beginning in April of this year the BOJ is set to begin marketing 149.capitalistexploits. 2) Front-loaded debt structure . It is also a game the Japanese Government has been playing for a long. is the essence of every Ponzi scheme ever created.7 trillion Yen (USD$1. which is itself needed to pay the interest bill on previous debt issuance. could easily be the straw that breaks the camel’s back and puts Japan into a situation that is likely to spiral out of control. The chart above clearly shows that Japanese households are saving less and less. Any tiny increase in yields on either the new debt issuance. Rolling ever increasing amounts of debt which will be financed by ever more debt.A Guide to Profiting from the Coming Japanese Financial Tsunami Why now? 1) S  avings rates are plummeting – Standard life cycle theory (something I just made up) suggest that a rapidly aging society coincides with equally rapid dis-saving. These are funds required to meet budgetary spending for 2012 which can’t be funded by tax revenues.   www.

In short. Japan has just reported their largest trade deficit on record. and the trend is only accelerating. Current signs are that it has begun swinging in the opposite direction. but the pendulum cannot swing much further in this regard. 6)  Declining tax revenues – The Japanese government spends twice what they take in. pension funds are as heavily invested as they are ever going to be in this market and will likely be sellers from here on out. which itself will pressure the Yen and cause inflation. but the increasing debt issuance that is now baked in the cake? www. Continuing to run a trade deficit means Japan must turn to foreign investors to finance their government debt or look to monetize debt issuance. It is theoretically possible to push debt servicing costs lower. Government tax revenues peaked in 1991 and have been declining consistently ever since. The combination of these two factors has led to a situation where today over half of Japanese government tax revenues are swallowed by debt servicing alone. 4)  Trade surplus shrinking and now negative. This will put the Japanese government into an increasingly perilous financing situation. 5) I  nflation – Rising energy imports due to the Fukushima disaster.at 6 .capitalistexploits. and is borrowing the difference. The combination of these factors is likely to force the BOJ to sell more short-term debt rather than long-term debt. There is no way out. The question therefore remains . 8) C  rowded trade – The structure of the market is such that Japanese citizens and corporations are more heavily invested in this asset class than they have ever been. In contrast. 7)  Debt servicing – Debt servicing costs under 1% are a complete anomaly when taking into account the fundamental situation of the government debt market in Japan. combined with a highly restrictive immigration policy ensures pressures will continue. The BOJ’s recent asset purchase program will have the effect of stoking inflation. and a declining population and workforce are manifesting in the trade deficit mentioned in point 4 above. or maybe bowhead whales. debt-servicing has been rising consistently for 20+ years.A Guide to Profiting from the Coming Japanese Financial Tsunami 3) Demographics – The oldest population in the world outside of tortoises.where is the marginal buyer going to come from to support not only the status quo. Pension funds are now selling ever increasing amounts of JGB’s in order to pay for increasing numbers of pensioners. which erodes the advantage of holding JGB’s at current yields. not buyers. A declining tax base and a nation of citizens who are now increasingly dipping into their savings to finance their retirement years is a double whammy.

which is what I am looking for. I quickly realized this was not how I wanted to make this trade. the market will be the ultimate arbiter. but as I will discuss later. There doesn’t exist any ETF’s in this space either. a Ranch Management certificate from Texas Christian University and is a graduate from the Entrepreneurial masters program at MIT in Boston.  As the BOJ monetizes the debt.  I am not willing to make the assertion that JGBs cannot actually RALLY from here.  It is true that the ETF would avoid the “negative carry” aspect of this trade. Tres: If I buy the Short JGB or the short 3X JGB.  I want to be positioned is such a way that I am short IF JGBs break. We both acknowledge we may be wrong. I think I have come up with a very reasonable strategy to battle this negative carry.  Chris: Right. Among them is our friend Tres Knippa. soaring borrowing costs. I know you’ve had the same dilemma for some time.at 7 . I lose money. I sat down with Tres to discuss the perilous situation of Japan’s finances. but not until then. but are collectively putting our money where our mouths are and as is always the case. Tres is a floor trader and broker in Chicago. is the ability to participate on the short side with the sort of leverage that we would ideally like to have. Options decay (theta) produces negative carry. Tres: As a fund manager. capital flight. the option market. When I first started looking at this trade and trying to participate. and a collapsing Yen. thus. He has been trading futures and currencies for over 17 years and is a registered commodity trading advisor to Kenai Capital Management He holds a BBA from Baylor University. their bond market (which he agrees sits on the edge of a very steep cliff) and most importantly we discussed how to participate in what we believe will be an historical trade. I think the options give me far more convexity. where he can get involved in the OTC market buying Credit Default Swaps.capitalistexploits. Massachusetts. The problem of course for us as traders and investors.A Guide to Profiting from the Coming Japanese Financial Tsunami Conversations with Traders There are some pretty sharp guys talking up this trade. Chris: Rising yields on JGB’s. I sold futures. and I cannot see any mathematical means for the Japanese Government to continue increasing their debt level and interest payments as a proportion of government revenues for much longer. You want the sort of upside available to guys with huge balance sheets.. then if the market goes up.  www.  It is my opinion that the best way to participate is with options. These are all issues you and I have discussed before and something we’ve both been very vocal about. like a Kyle Bass. one of the biggest headwinds I can face is “negative carry.. which might normally seem attractive to smaller traders. I am in the option market because I want to be short IF we break. No thanks.” Negative carry is something that this trade has going against it. it is certainly possible that JGBs can go up some more. who don’t have a $100 million balance sheet to put to work. The facts are the facts.

then you’re doing exceptionally well. My friends believe me.A Guide to Profiting from the Coming Japanese Financial Tsunami Chris: Right. How much option decay am I willing to stomach while I wait for something to happen?  This is the dilemma that kept me awake at night for over a year.    www.  Chris: Explain how you worked out your present strategy of using a combination of futures and options contracts to allow for the massive upside while curtailing the risk side of the trade. My strategy uses a combination of selling an option spread in order to pay for larger amounts of further out of the money options. What are your thoughts on the reward side of the spectrum? Tres: Regulatory restrictions prevent me from putting a number on the upside. The 1/10 size gives me an instrument I can use to hedge my option strategies I trade at the TSE. I’ve been short the Yen directly in the spot market for a little while now as I believe that the BOJ will look to monetize debt before looking to seek buyers for their debt offshore. 100x return could be being too conservative. This is exacerbated in the double and triple leveraged ETF’s. Positioned properly and with the right series of events.  The other aspect of my strategy is the utilization of the variety of instruments available to me.  Who remains to buy this stuff?  Answer: the BOJ. I’ve mentioned to some friends that this could well turn out to be a 50-100x move when it takes place. Other well known fund managers have on many occasions referred to this trade as having 100x potential. while the former might buy a little more time. What is your opinion on this? Tres: The BOJ monetizing the debt has the appearances of being motivated by an effort to weaken the yen. but others give one of those looks which are kept exclusively for insane people. certainly when one considers this trade from a risk/reward standpoint. Without getting too technical here.   Chris: Fighting decay while keeping the enormous upside that exists with your strategy is the key to this really isn’t it? Tres: You bet it is. It’s the core strategy. Far from it I am afraid. which is what one would expect when purchasing LEAPS.at 8 . what do politicians do? They spend money and make promises to spend more money in order to get reelected. The TSE (Tokyo Stock Exchange) trades a JGB futures and options contract and the SGX (Singapore Futures Exchange) has a mini-contract that is 1/10 the size of the TSE contract. or even lose a small fraction on a monthly basis. one aspect of course of the ETF’s is that of tracking error.capitalistexploits. Tres: The biggest risk of this trade in my opinion is TIME. How does Japan spend money? By borrowing it.  One common misunderstanding is that central banks are independent.   Chris: If you can keep your capital intact.  Think about it. it lets me lay off my positive deltas in tenths. I disagree. Volatility destroys your capital even where the market is moving in the direction you anticipate. How do governments borrow money? By issuing bonds. This gives me more exposure to a large downside event but takes away some of the “negative carry” issues inherent in a long options strategy. The latter is an immediate check mate. I think the purchasing of JGBs by the BOJ is politically motivated. In my humble opinion they’re best suited to day traders.

it’s akin to searching for the egg yolks in scrambled eggs. I would expect the value of that asset to rise. The BOJ announced their intention to push consumer price inflation to 1% using their own version of QE. I would imagine that demand for a 10-year bond with a 1% yield would drop significantly. the Japanese government.  You know Chris we spoke about this together just after the Bank of Japan (BOJ) announced a plan to increase monetary easing by boosting purchases of long term government bonds. Please keep supporting a policy whereby the Japanese government spends more than twice what it generates from tax revenue. a 1% yield on the 10-year may not seem so bad.A Guide to Profiting from the Coming Japanese Financial Tsunami Chris: Ok. Deflation is what is feeding demand for JGBs. Given that it’s presently sub 2%. the BOJ made a very public policy of fighting deflation and attempting to boost consumer inflation to 1%.  Once the BOJ announced that they would step up purchases of JGBs. Show me an independent central bank . the citizens of Japan. Not too bad. Tres: For a moment lets ignore how horribly irresponsible and unsustainable it is for one agency of a government to assist in financing the bad policy of another.capitalistexploits. As long as consumer prices and costs of living continue their downward deflationary spiral. If you have deflation of 2% and a bond yield of 1%. or do they not realize the repercussions of a positive inflation environment and how it would impact their debt financing situation? “Positioned properly and with the right series of events. real inflation rising. it was the day that I think the world changed for Japan. Are these guys simply trying to play a word game. As if taking its cues from the US Federal Reserve.at 9 . By all means. the PM of Japan are all abundantly aware of the important fact that a www. it’s insane. JGBs are roughly the same price now as they were on February 13 after that announcement was made.  Chris: Yes. Perhaps we should take this announcement for exactly what it is. I think it’s always smart to review what the market is telling us as traders since the market is the ultimate “decider. Perhaps we should dig a little deeper here. then we should have seen a big jump up in JGB prices right? If our government were to announce a program to buy large amounts of a particular asset. What if the BOJ gets what it wants? Will Japanese investors be quite so keen on a 1% yield in a positive inflationary environment? If they reach inflation targets. then you have a real yield of 3%. please keep lending your government money it cannot ever pay back. The market will realize this in time. 100x ROI could be being too conservative” Tres: Inflation is the LAST thing the BOJ wants or needs at the moment.” With that in mind what are you seeing in the markets right now? Tres: February 14 was more than just Valentine’s Day this year. This is the BOJ trying to tell the bond market that everything will be just fine. Checkmate! Chris: I can see a lot of monetization coming.  A government buying its own debt is not sustainable. The BOJ. this would destroy the real yield advantage that Japanese bond holders currently enjoy. all countered by a barrage of hedonistic adjustments causing nominal deflation. It might work for a bit. Central bankers are whores to the politicians when push comes to shove.

The BOJ made the announcement in an attempt to weaken the Yen and let the market know they intend on supporting the bond market till the bitter end. My job as a trader and fiduciary is to minimize losses for as long as I can.com www. or even prices seen in mid-January. until the trade starts working. What is your sense of timing. Did the JGB market actually have a big jump? Well. but the price did not take out the highs we saw earlier in February. I think it will happen. not exactly. so of course they are going to buy bonds. Chris: I’d like to come back to your trading strategy for a second. right? Chris: It’s perverse. and how do you see things moving once the realization hits that the Japanese government is actually bankrupt? Tres: I am not willing to pick a top in a market that has not been willing to break for over 20 years. but I am confident in saying that the price action does not match the news. Is this anything that we did not already know? The bond market rallied on this news. some of my best trading days have come from going with market action that appears to be 100% contrary to recent announcements.capitalistexploits.A Guide to Profiting from the Coming Japanese Financial Tsunami small increase in bond yields is just not possible. hypothetically speaking. Tres: As a floor trader in Chicago. They can’t afford for rates to rise. March JGB futures rallied on the news in Tuesday’s trade. A small increase in borrowing costs sends Japan into an immediate debt crisis.   Tres manages the mechanics of this trade for clients. Should we have expected a large jump in JGB prices? Perhaps. If you wish to become a client and participate in this trade with Tres then contact him at capxsjd@gmail. We love the strategy and think Tres is one of the best guys to be managing our money too. I am not confident enough to say that the market is about to reverse a 20+ year trend. we get Japanese CPI moving into positive territory and bonds become less attractive. We should identify recent price action in the Japanese Government Bond (JGB) market as potentially one of those moments. with regards to the impact felt in the bond market. but clearly I have no idea when. Let’s say.at 10 .

However. Yes.at 11 .. the budget deficit. This is the most invested/overweight that Japanese nationals have been in the JGB market since the Nikkei peaked in the late 1980s. Brad’s returns were consistent with a return on capital of about 10% compounded per annum. You don’t want to be long bonds if inflation spikes higher. Significant downside always occurs when markets are crowded on the long side. Brad now trades his own account from his offices in Sydney. “Significant downside always occurs when markets are crowded on the long side” Furthermore. and where electricity prices go so follow a whole lot of other prices. the fundamentals look shocking for JGBs given the debt to GDP ratio of some 230%. etc. Australia. www.A Guide to Profiting from the Coming Japanese Financial Tsunami Views from successful trading guru Brad McFadden Brad is another trader we respect a lot. the worst enemy of a nations’ treasury/bond market is inflation. outside of the BOJ printing money to buy bonds. The markets I am focused on and the rationale for trading these markets The main market that I am focused on trading is Japan. The reason for focusing on these markets is twofold: a)  My long term fundamental view. inflationary pressures are being helped along by an overreaction to the Fukushima disaster. Inflationary pressures appear to be building rapidly. He shares a similar view of the Japanese debt markets to our own and I asked him to share his ideas with us. Let me explain my view and then I will detail the way in which I am applying this view. As far as I am concerned it all begins with the JGB market. thereby providing a return on equity of about 30% per annum.capitalistexploits. specifically the broad equity market. The primary reason relates to market structure. working for Rand Merchant Bank. the aging population. Given this fact. The book was leveraged three times. and. However. He’s been trading. b) The asymmetric payoff profile I can achieve in applying my bullish view on the Nikkei and bearish view on the JPY and JGBs. stock broking and managing portfolios for close to two decades. this isn’t the primary reason as to why I am very bearish on JGBs. The BOJ is convinced that it needs to create inflation to pull the Japanese economy out of its seemingly never ending downward spiral. Most of Japan’s nuclear reactors have been taken off-line and the shortfall in electricity generation is being made by oil fired power stations. Now. In his proprietary trading days. it is difficult to imagine where the marginal buyer of JGBs is going to come from. For almost a generation Japan has been locked in a deflationary condition. things are changing. Yet this is precisely what appears to be happening in Japan.. the Yen and JGB. The result is that electricity prices are rising in Japan for the first time in over 20 years. It would appear that being long the JGB market is the most crowded trade/investment on the planet.

So developed nations will continue to head down the road of inflation until they can no longer do so (until inflation gets out of hand and makes the 1970s look like a walk in the park). My feeling is that there will be an ultimate price to pay for all the money printing. This is the most under-weighted Japanese nationals have been in the Japanese equity market since the bear market started in the late 1980s. To me the most important decision to make is whether or not to be long or short an asset class. equities and commodities. I think it is politically unacceptable to have deflation (everyone is well aware of the deflationary nightmare that Japan went through over the last 20 years). bonds. What is the catalyst likely to be to push stocks materially higher? The same thing that is likely to push yields on JGBs higher . Much of what is bantered about in the press of popular opinion is mere dramatization. Deflation has dogged the Japanese economy for about 20 years. However. this isn’t the most appealing aspect to wanting to be long Japanese equities. So if one looks at just how cheap Japanese equities are from a fundamental perspective and how under owned they are it is very difficult to make a case that we will see material downside in Japanese equities. It is much easier to trade broad asset classes because it isn’t too difficult to understand the underlying structure of the market (just where weak and strong hands are positioned) and the flow of capital between asset classes. and stimulus measures that many developed nations have engaged in over the last 3 years. It appears that they are in the process of doing so. the next big move is likely to be to the upside. as traders we have to be careful here.at 12 . and implied volatility on Nikkei options hasn’t been much lower over the last 8 years. Rather. This deflation has coincided with a bear market in Japanese equities and bull market in JGBs. When this underlying condition reverses to inflation the bull market in JGBs and bear market in equities will reverse. This is the lowest implied volatility on JGBs at least since 2000 (that is as far back as records go). That ultimate price will likely be inflation. What this means is that you can get dramatic asymmetric payoffs on call options on the Nikkei and puts on JGBs.A Guide to Profiting from the Coming Japanese Financial Tsunami Valuations of Japanese stocks are extremely low. bail-outs. They are not materially different from levels reached at the height of the GFC in 2008 and the lows of 2002. “What this means is that you can get dramatic asymmetric payoffs on call options on the Nikkei and puts on JGBs” www.capitalistexploits. particularly the last 12 months. In terms of the global sovereign debt issue. Change rarely happens unless it is forced upon governments. I am a macro trader.inflation. rather than what securities to trade within each asset class. I trade currencies. The application of the view What makes being bullish on Japanese equities and bearish on JGBs so attractive are the extreme low levels of implied volatility on options trading on the Nikkei and particularly JGBs.

at 13 . Readers can get a hold of Brad at www. Why am I choosing to trade Japan now. Japan has suffered from deflationary monetary conditions for years. and I am riding an inflationary wave. If the JGB market does not collapse within the next 18 months (to be conservative) then I will have to conclude that I am completely wrong in my bearish JGB view. In terms of the relationship between Japanese equities. So this is the framework with which I work within. What I don’t know is just which asset class will move the most. The platforms I use are the Saxo Bank platform (primarily for currency trading and FX options). Getting straight to the point . I am also long calls on the USD/JPY and EUR/JPY. If Japan moves into an inflationary monetary condition. So I have positions in all three asset classes.e. The thing that ties them all together is inflation/deflation. This is why we are likely to see a dramatic rise in yields on JGBs and equities as inflation hits the Japanese economy. there is enough liquidity).they are all highly inter-correlated. JGBs and the JPY .Japan is the least prepared country in the world to deal with inflation. The market will take us there. I’m long Japanese equities (via calls and CFDs on the Nikkei) and short JGBs via SGX Mini Futures and put options on TSE JGB futures. I generally concentrate on LEAPS but only where the implied volatility is very low. of that I am very sure.A Guide to Profiting from the Coming Japanese Financial Tsunami In my experience governments operate on a “if it ain’t broke don’t fix it” philosophy. I have been buying 3 month to expiry calls on the USD/JPY because the volatility was significantly lower than 12 month to expiry calls. I have no idea as to how far it will take me and for how long. One of the primary reasons I have such a big position in Japan. which has coincided with a bull market in the JPY and JGBs and a bear market in Japanese equities. and where the big offer spreads are tight enough (i. How do I trade markets? Whenever I am trying to capitalize on just a couple of big trades I will generally look at buying puts. and the Interactive Brokers platform (for physical positions. is that Japan is addicted to deflation and an ultra-low cost of capital (interest rates).dailytradingreport. Usually implied volatility is at or near all time lows because no one in their right mind will think that this outcome will occur. I will use futures occasionally when there isn’t a liquid option market or when options are a little too expensive. why not 6 months or 12 months ago? I was waiting for the Japanese to adopt inflation targeting. we just need to follow the signs.com www.capitalistexploits. options and futures). One has to be a little careful of preconceived ideas of what the final outcome will be. To me the decision of the BOJ a month or so ago to actively try to create inflation was the tipping point. The TSE JGB futures options have good liquidity but they only go out to about 2 months to expiry at best. these long term trends will reverse. So what one must do is put aside enough capital to ensure that you are able to buy puts on a monthly basis for the next 18 months.

The real rate of return on equities from dividends alone is now such that competition has arisen.capitalistexploits. Japanese equities today are trading at the same price as they were 30 years ago. One thing to consider with this fund is that it is not currency hedged.05. so we can see that a small 100 basis point rise in interest rates would wreak havoc in the banking sector. we find that at the moment the dividend yield on Japanese equities more than doubles the return on the 10-year JGB. Contrasting the 10-year JGB against Japanese equities. www.A Guide to Profiting from the Coming Japanese Financial Tsunami What about Equities? Brad has a good point regarding Japanese equities. Looking at them from a priceto-book ratio they trade at roughly 0. If we use Benjamin Graham’s model we wouldn’t buy anything for more than a price to book value of 1. and as such would be selling US equities and buying Japanese equities.” Bonds decline as interest rates rise. Japanese equities collapsed in 1990 with losses being incurred by investors for 20+ years. we believe inflating the debt away is a more likely course of action. holds fully 75% of their funds in Japanese Government bonds. In fact.8. it’s not hard to imagine every major bank in Japan requiring a bailout. The retirement fund has begun selling roughly $80 billion annually in JGB’s as benefits are paid out to it’s retirees. This is not optimal if you are expecting a weakening yen. As such. pre-bubble. which is the world’s largest financial institution. Almost no one. so it benefits from a strong yen and suffers from a weakening yen. This leads us to looking into what asset classes are likely to benefit from monetization of these enormous debts. This is both due to equities being very cheap as well as JGB’s being very expensive. According to an IMF working paper authored by Waikei Raphael & Kiichi Tokuoka available here. One benefit of this fund however. sans the contrarian players. which trades on the NYSE.at 14 . is that it is liquid with an option chain out to 2014. Some easy means for retail investors to take advantage of rising Japanese equity prices are going long iShares MSCI Japan Index Fund (EWJ). According to the BOJ (Bank of Japan) a 100 basis point increase in interest rates across all maturities rose the value of interest rate risk (including from loans) by around ¥500 billion at the major banks and about ¥400 billion at the regional banks in FY2010.2. Contrast this to US equities. Japan Post. respectively. The financial crisis that swept the world in late 2008 and 2009 led Japanese banks and institutions alike to seek safety in Japanese Government bonds. even want to talk about Japanese equities. Pray tell who has the wherewithal for such a bailout? Since most debt is held by Japanese citizens. which trade at a price-to-book ratio of 2.1 trillion. The total value of interest rate risk (including from loans) corresponds to 10 percent of major banks’ tier 1 capital and more than 30 percent of regional banks’ tier 1 capital. default on those obligations would be political suicide. with assets totaling $2. “ Japanese banks hold more than 15% of total assets in JGB’s.

This will have the effect of pressuring the Yen. or buying puts on the Currency Shares Japanese Yen ETF (NYSE: FXY). NYSE: JOF and NYSE: JEQ are both closed end funds focused on Japanese equities which appear to be well-managed and worthy of further investigation. which tracks a dividend weighted index of value stocks.at 15 . Another. • USD/JPY • EUR/JPY • XAU/JPY • XAG/JPY While it is possible to use leverage in the spot FX market. While not conclusive by any means. If appropriate risk controls are not implemented. below are some popular currency pairs. www. Currency – What about the Yen? As mentioned earlier in this report.capitalistexploits. it is our contention that the BOJ will increase the monetization of the country’s debts. Either buying calls or puts on the currency pairs mentioned above. there are risks to being wrong. controlled-risk alternative is the options market.A Guide to Profiting from the Coming Japanese Financial Tsunami A better option if you are not seeking the leverage of options would be the Wisdom Tree Japan Hedged Equity Fund (DXJ). complete wipe-outs are possible. Short selling the Yen in the forex spot market with appropriate risk control is one means of profiting from a declining Yen.

A Guide to Profiting from the Coming Japanese Financial Tsunami SUMMARY We believe the risk/reward setup of the trades and positions discussed in this report to be sufficiently favourable to take positions with our own capital. Like us. Disclaimer This report is intended for informational purposes only and is not intended to provide personal financial advice.at 16 .. the parent company of capitalistexploits. All information contained herein should be independently verified. If you’re already a subscriber then please invite your friends here.086.000. brokers. Life Insurance Companies and Bedroom Talk… • Japan – A Budget to be Proud Of! • Crescendo of Debt – ¥1.at (CE). and seeks to do business with. If you haven’t already done so you can sign-up for our free blog here.capitalistexploits.000 Sincerely. www. Mark and Chris and Capex Ltd. you our readers are solely responsible for your own investment decisions. and those that are sanctioned to provide you with advice. CE does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. are not licensed as financial professionals. accountants. anywhere on this big ball of dirt. Further reading material on this topic is available at www. and you should always consult with your attorneys.000. The information contained herein does not constitute a solicitation for the purchase or sale of securities. but no representation or warranty. financial planners. Our opinions and analyses are based on sources believed to be reliable and are written in good faith. Mark and Chris Feel free to forward this report. The editor and publisher are not responsible for errors or omissions. companies covered in it’s reports. expressed or implied. In full disclosure. CE does. Readers are encouraged to conduct their own research and due diligence and obtain professional advice before making any investment decision. bankers or even candlestick makers in any jurisdiction. Investors should be aware that as such CE may have a conflict of interest that could affect the objectivity of the report.capitalistexploits. We do not know your individual situation.at • Betting on an Inevitable and Overlooked Crisis • Japan. we have multiple positions targeting the Yen and may add or reduce positions as we see fit at any time.000. is made as to their accuracy or completeness.

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