The Great Japanese Unwind?

Leo Kolivakis's picture

Via Pension Pulse.

Bo Peng wrote a comment in Seeking Alpha, The Great Japanese Unwind and How It Will Play Out Globally:

My last crystal ball reading of market aftershocks
from the tragedy in Japan has been mostly correct, in retrospect, with
one big mistake: the Yen keeps surging. Apparently I underestimated
the extent of Japanese repatriation, which has probably been sustained
by the worsening of the nuclear situation.

FT Alphaville just posted a table
listing overseas holdings by Japanese investment trusts. It doesn't
provide any direct trading guidelines. For example, Japanese investment
trusts own 7% of the Vietnam stock market, which has barely budged
since the earthquake. But at least it provides a partial picture of the
potential extent of the ongoing Great Japanese Unwind. Nobody knows
how big the carry trade unwind by Mrs. Watanabe is. But it's prudent to
assume that, given the high savings rate in Japan, repatriation may
continue for awhile if the nuclear situation keeps worsening. Too bad
for Japan Inc., since a strong yen is exactly what they don't need.

changes the short-term (days) trade. If the situation improves, stocks
would rebound strongly while the yen may drop; otherwise more of the
same -- tanking stocks and surging Yen. Whether this will impact U.S.
Treasuries or not remains to be seen.

But it doesn't
change the longer-term outlook. Japan will surely go into recession,
possibly a severe and painful one. And, since central bankers all over
the world are 100% confident they can eliminate business cycles that
are the healthy, evolutionary mechanism, self-correcting the
fundamental flaws of the free market system, much like a forest fire,
BoJ will continue printing their way into disaster. Where JGB has been
at the peripheral of the bond vigilantes' radar so far, it will be at
the center soon (could be in months). On this side of the pond, the Fed
will of course continue printing as the economic fallout trickles in.

big question is whether this unwind will be contagious and trigger a
global one comparable to the panic in 2008. My answer is no. It is very
unlikely that a nuclear meltdown, as terrible as it may be for Japan,
would cause much global direct damage.


A Japanese
recession would have global implications, but it would come later and
slower. Precious metals and commodities will enjoy strong support by
the suicidal central bankers. Granted, commodities inflation driven by
excess money will kill all economies; but that's of no concern for
central bankers since their goal in life is to create inflation, and
their inflation detector is designed not to detect any until too late.

commodities rebound may be delayed compared to precious metals,
though, because the supply-demand argument may cause some hesitation.
But people have no choice other than to continue on the moronic,
suicidal path of commodities inflation, driven by moronic central
bankers around the world. No doubt central bankers are very intelligent
people. Problem with very intelligent people is that they can screw up
much bigger and for much longer than others are capable of.

And a few things we can say are not:

  • The
    earthquake/tsunami/nuclear-meltdown triple whammy is not bullish for
    Japan nor the world at large. It's hard to imagine a more idiotic
  • The commodities market is not driven by supply-demand at the time-scale longer than days at most.
  • The yen's surge is not because it's a safe haven.

Disclosure: I am long GLD, PHYS, SLV, DBA.

that again Mr. Peng? A nuclear meltdown in the world's third largest
economy will not trigger another global downturn? Can central bankers
cushion the blow by printing potassium iodide laden paper currency?
Let's get real here, if Japan implodes, the fallout will make 2008 look
like a walk in the park!

Having said this, there is a tremendous amount of hysteria
going on right now and a lot of it is fueled by Japanese authorities
who are not being transparent with the world on what is really going on
at these nuclear plants. Along with mass hysteria comes crazy market
volatility. And market participants are nervously watching the yen carry
trade. Fox Money reports, Yen Hits Record High Versus US Dollar:

Japanese yen touched a new high against the US dollar Wednesday, with
the greenback dropping below 80 yen, as concerns over the nuclear
situation in Japan intensified, weighing heavily on US and European
stock markets.


“The problem is that as the
fallout from the earthquake is creating a drag on stocks,” Japanese
corporations are selling stocks, said Andrew Wilkinson, senior market
analyst at Interactive Brokers, and the money from those sales “is
finding its way back home through dollar sales and purchases of yen.”


Wednesday, the US dollar touched a low of 79.73 yen, a new record. The
yen recorded its previous all-time high versus the dollar at 79.75 in


The dollar recouped some of its loss to trade more
recently at 79.82, well below its level of 80.73 in North American
trade late Tuesday.


“The nuclear situation in Japan could be out
of control if the Europeans are right in their assessment, and
investors are taking no chances with that,” said Kathy Lien, director
of currency research at GFT, in emailed comments.


The European
Union’s energy commissioner warned Wednesday that “possible
catastrophic events” in Japan could be seen in mere hours, according to
news reports.


The US also urged its citizens within 50 miles of Japan’s Fukushima nuclear plant to evacuate or remain indoors.


nuclear situation is a component of the situation in currencies,” said
John Kicklighter, currency strategist for, in emailed

The euro traded at 110.82 yen, down from 113 yen Tuesday.


you have here is opposing forces on the Japanese yen: Foreign capital
is leaving due to the uncertainties that persist in the economy, while
funds are also being repatriated due to the subsequent carry [trade]
unwinding,” Kicklighter said. “At the moment, carry unwinding is proving
the larger theme, but that will not be the case forever.”


unveiled this week by the Bank of Japan include an increase in the
size of the bank’s asset-buying plan to 10 trillion yen ($124 billion).


Lien said the biggest question currency traders face is whether or not
the BOJ will step in and artificially weaken the yen.


central bank’s liquidity injections stabilized the equity market [in
Japan] but failed to stop the yen from rising, she said. The Nikkei
Stock Average climbed nearly 6 percent Wednesday.


“The endless
superyen continues to operate -- against all odds,” said Richard
Hastings, a macro strategist at Global Hunter Securities.


is going to use its muscle,” he said, taking the dollar-yen exchange
rate closer to an all-time low of about 77 yen to the dollar.


would be bad for Japan export stocks, but it gives Japan huge buying
power in forex and raw goods, helping them to rebuild,” he said.


yen, as well as the dollar, have traditionally been seen as safe-haven
currencies, and analysts have said that a likely repatriation of funds
as Japan rebuilds after the massive earthquake is set to boost demand
for the Japanese currency.


But while the dollar continues to
lose ground versus the yen, it’s gaining ground against the euro as the
European and US stock markets suffer steep declines.


are seeing widespread selling of equities and high yield currencies,
sending currency traders back into the arms of the US dollar,” said


The euro slipped to $1.3892 versus the dollar after
changing hands at $1.40 late Tuesday. The British pound traded at
$1.6018, off from $1.6082.

It's also worth noting that despite what Bill Gross of PIMCO said about dumping US government securities
(Cough! Watch what Bill does not what he says!), US Treasuries have
rallied sharply since the Japanese crisis erupted last week as investors seek a flight to safety.

And while my fellow bloggers over at Zero Hedge have called Wednesday "The Day The Yen Carry Trade Died,"
I think such calls are premature and feed more hysteria. The yen carry
trade isn't dead. Far from it. Commodity currencies like the New Zealand
kiwi are getting roiled but this isn't exactly a surprise as risk trades are off as traders assess the news coming out of Japan. But
when I hear people warning that Japan will sell all their US bond and
equity holdings, I just roll my eyes and ignore the nonsense.

Finally, the question I've been getting the last few days is "should I
buy the dips?". My answer to those who ask me this question is "can you
stomach gut-wrenching volatility?" I can because I invest almost
exclusively in Chinese solar stocks and have seen my personal portfolio
swing from -60% to +80% over the last year. I just kept buying the dips
and averaging down. If you can handle crazy volatility, keep buying the
dips, the reflation trade is alive and kicking and we have not reached
the absurd bubble phase yet (we will). If you can't handle volatility,
stick to cash and sleep well at night. Below, the latest on the Japanese

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mbasham's picture

leo, again? really? aren't you tired of being wrong?

Leo Kolivakis's picture

Buddy, my calls on stocks have been right all along. I have enough blog posts to prove it!

traderjoe's picture

Always such certainty based upon the Pigmen reflating. Inflation/deflation is the democrat/republican argument. He's what I think: Japan gov fails, repudiates bonds, and triggers worldwide financial crisis.

chindit13's picture

There is a great mismatch between the estimated level of insured losses ($25 billion) and the estimates of total damage (approaching $200 billion).  A good portion of this, I believe, is due to Japanese property owners being underinsured and uninsured against the kind of catastrophic loss associated with a tsunami.  This represents complete capital destruction.

The general public, especially the residents of north Japan, probably hold little or no external assets outside of Japan.  The selling/repatriation would be coming from insurers, corporates and perhaps the government (depending on how they decide to pay for the clean-up and undoubted emergency supplemental budget).

The general public who suffered losses will dip into their Yucho and Kampo accounts to fund themselves, rebuild homes and businesses, etc.  The government will probably cover these withdrawals by printing yen.

Corporates and insurers, while they hold a sizeable portfolio of UST's, also hold sizeable portfolios of HY debt of US firms.  The UST's are more liquid, but the junk is more likely to suffer if the world economy slows again.  I'll be looking to see how the spread trades between HY and UST's for an indication of what the Japanese will do.

As for the carry trade, I think some players will have gotten slaughtered this week and won't be back.  I also think that two big hits in three years might finally discourage people from playing.  I would also guess Geithner will have a few sleepless nights, since yesterday reminded the market yet again how vulnerable the system is to TBTF banks, and since he has done absolutely nothing to correct that.  Joining him in the land of insomnia will be the Prime Broker desks, who might have trouble reaching customers on the phone.

anvILL's picture

>I also think that two big hits in three years might finally discourage people from playing.
I don't think two lessons are enough.
You know, "Nido aru koto wa sando aru"
(What happens twice will occur three times)

The Answer Is 42's picture

In terms of direct radiation impact from the nuclear metldown, if it happens, I at this point still don't think it'll likely become a global problem. It could change, and I'm watching.

In terms of economic fallouts, there will be grave global implications, as I said clearly in the post. I just don't think it'll be the kind of chain-reaction, across-the-board, panic unwind of 08.

I'm still trying to understand the JPY action. How much of it is real repatriation? How much just the speculation of it? How long will it last before the trade collpases, probably very abruptly? JPY is not a fucking safe haven at this point. Even though risk-off may be a driver, it still does not mean it's a safe haven -- it's necessity, or the speculation thereof. I misjudged this trade Friday and paid a bit price for it. I hope to learn enough from it to make its worth.

bullchit's picture

Hindsight is a wonderful thing, eh, Leo?

'And what were you saying when the dollar was dropping 78/77/76.....and no bids?

Nothing....Tight-lipped. 'And now the dust has settled?.....Gums flapping. You should be a fucking politico.


hungrydweller's picture

Down 60% and up 80% is still down 28% overall.  Man I  am glad you are not managing any of my money or else it would soon be my "noney".

nmewn's picture

"Down 60% and up 80% is still down..."

You saw that as well ;-)

Leo Kolivakis's picture

Thx, I edited that statement. :)

Bear's picture

Chinese Solar may be up this year but the real buy right now is uranium (Aus:ERA at 7.49, US:EGRAF.PK) ... Japan will rebuild and expand nuclear capability and China will buy this dip (maybe buy several large Aussie miners)

mt paul's picture

if ones exports are in decline  

a strong currency for imports, 

 becomes advantageous....


as long as it's not radioactive .... 

RoRoTrader's picture

about the yen when i lived in japan i had a conversation with the buyer of steel for Kawasaki's Kobe shipbuilding yard it was explained that down times were/are used to strategically redesign/retool for competitive streamlining if i were thinking like the japanese think i may be thinking to redeploy big for long forward contracts for commodities/currencies with all of this historic Yen strength in the face of the current natural disaster which is bad but also has relative context.

not buying into a rerun of a higher USD against other major crosses not at this point it looks like more QEs

New_Meat's picture

repost of some one else's work

RoRoTrader's picture

The USD is not exactly catching fire against its OECD crosses. There is selling , yes, but given the panic rhetoric, selloffs in equities and the Nikki and Yen crosses the runup in the dollar has a muted tone to it, at least so far with JPY being the very obvious exception.

In another time in an environment like this shorting the EURO and GBP were reflex trades. As of tonight neither the Euro or Pound are being trashed against the dollar.

Also seeing atypical hesitation as a common theme creeping into trades made by experienced and reputable traders looking for the 'risk off' psychology.

This evolution looks slightly more complicated than the last crisis so commodity currencies may be very nice buys at or around current prices.

Also agree with Hunter's comments re the Japanese having huge buying power in fx and raw goods helping the country to rebuild.........silver lining for Japan and no doubt the FED and other central banks are likely to followup with BOJ money printing.

As a second thought and caveat to commodity currencies being a buy is if Japan implodes then the AUD/JPY certainly breaks lower than the 74.00 seen today and back to the 55s seen in the dark days of late 2008 and early 2009.

eddiebe's picture

With currency crises looming I think that sticking to cash is hardly a good perscription for sound sleeping.

AN0NYM0US's picture

From someone/thing that is often critical and even cynical of your viewpoint, this is a good post Leo, some rational and considered perspective in the malestrom of hystericalpanicphobia that seems to have consumed the blogosphere, ZH and the MSM - as if potassium idodide is some sort of elixir to the woes of a depressed American populace that thinks it will soon be consumed by a radioactive Japanese Mushroom Cloud - there must be a full moon a comin'



PS I do have time for those who put credence in perigee syzygy


and separately this from El Erian late today

CPL's picture

There is a full moon coming.  The astronomical SUPER MOON!!!


COming soon to a theatre near YOU!  Hopefully it's clear, should be very pretty.

RoRoTrader's picture

Using your analogy of the meaning of a SuperMoon from nature I interpret that to imply an exceptional buying opportunity is coming.