Posts Tagged ‘JGB’

Positioning Yourself for Japan’s Potential Demise…

October 28th, 2009 Michael McDonough 5 comments

-Strong domestic demand for Japanese government bonds has permitted Japan to keep interest rates at or near 0 despite significant increases to the government’s debt burden, with no significant currency depreciation, and almost no economic growth. But, this model may be coming to an end

-An aging Japanese population will have several negative effects on the economy: 1) Higher taxes to fund the country’s pay as you go social security system. 2) Retirees will begin drawing from savings to fund retirements. & 3) Reduced demand for JGB’s will force the government to seek capital outside of Japan, which should lead to a run-up in rates. Any increase in interest rates should have substantial effects on the government’s ability to finance it’s debt.

-The ‘illusion’ of the YEN being a ‘safe-haven’ currency could soon dissipate. Not to mention the aforementioned issues, the bulk of Japan’s economic growth–and decline–has stemmed from the export sector. A strengthening Yen against its trading partners will add further pressure to this sector, and place additional pressure on Japan’s growth going forward.

Take a short position on the Yen versus USD:

*Buy USD/JPY puts

*Short YEN against USD (ETF: YCS)

Open a position to take advantage of anticipated rise in Japanese rates:

*Buy call options on Japanese yields

**For a more detailed look into this topic please see my column posted on’s RealMoney section.