Ex-Soros Advisor Sells "Almost All" Japan Holdings, Shorts Bonds; Sees Market Crash, Default And Hyperinflation

Tyler Durden's picture

Previously, we have pointed out why Japan's attempt at reincarnating its economy, geared solely at generating a stock market-based "wealth effect", and far less focused on boosting the country's trade surplus or current account, is doomed to failure, namely due the drastically lower equity participation by the general population and financial institutions in the country's stock market. Sure, foreign investors will come and go renting each rally for a period of time, but unless the local population participates in the "reflation attempt" (which has already sent the price of luxury goods, energy and food through the rood), or in other words change the behavioral patterns of two generations of Japanese in under two years, the inflationary shock will simply leads to a loss of faith in the government and ultimately Abe's second untimely demise. Not surprisingly, 4 months after Japan set off on the most ludicrous economic experiment in history, and one week after the BOJ announced its plans to double its balance sheet, Abe's approval rating has already begun sliding with a poll by Asahi just reporting that popular support of Abe's cabinet is already down to 60%, down from 71% a month ago.

The reflationary reality has finally started to get official recognition with the very Goldman Sachs (who like in Europe and the US is behind this epic experiment in hidden taxation of consumers) asking how popular inflation would be in Japan, and answers:

How popular will inflation be in Japan? Assuming the BoJ is successful and inflation rates rise, one interesting dynamic will be the political support for 'super-easy' monetary policy. The majority of financial household assets sit in deposits, which until now have earned a positive real rate. While long-term inflation expectations move higher, the Yen and equities re-price rapidly but the negative impact on deposit returns from negative real rates will only be felt once inflation has actually started to materialise. This is clearly not an immediate concern as the government’s approval ratings remain high ahead of the Upper House elections this Summer. Still, PM Abe’s policy aim of beating deflation may become less popular at some stage because the implied distributional choices of higher inflation may become clearer for voters. For example, higher inflation would re-distribute real income from (older) savers to (younger) wage earners. But again it is worth thinking about the exact sequencing. By the time inflation in Japan becomes settled in positive territory the Fed may well be on the verge of hiking rates. In essence, any concerns about inflation in Japan and debate about a BoJ policy response will likely arrive at a stage when Fed tightening and JPY carry trades have already become the dominant theme.

In short, yes, Japanese inflation will destabilize the economy, and almost certainly lead to yet another political upheaval, but by then Japan will have served its purpose and injected some $1 trillion into the US stock market, thus supposedly allowing the US economy to become self sustaining. Or not. As to the consequences that the demographically-challenged Japanese population has to face as it suddenly finds itself holding worthless pieces of paper... who cares.

Which means that Abenomics will ultimately fail to fix Japan, but at least there is some hope it will last long enough to send the S&P to even more ridiculous highs - which, when one cuts out all the noise, it really what the whole experiment is all about.

For Japan, there is still some hope that the country will stop this ludicrous experiment merely serving to feed US risk assets before it is too late. Luckly, we are not the only ones seeing the writing on the wall. A month ago, it was "Mr. Yen", former finmin Eisuke Sakakibara, himself, saying "Abenomics" is going to fail.

"In terms of two percent inflation, it ['Abenomics'] will fail. Deflation is structural. Even at the time, when Japan was in the upward [growth] swing between 2002 and 2007, prices went down. It will be extremely difficult to get out of deflation," said Sakakibara, also known as "Mr. Yen" for his efforts to influence the currency's exchange rate through verbal and official intervention in the forex markets in the late 1990s.

 

According to Sakakibara structural deflation in the world's third largest economy is largely a result of the integration between the Japanese and Chinese economies and hence near impossible to move away from.

 

"Cheap Chinese goods come into Japan and push down the prices. And a lot of Japanese companies go to China to manufacture goods — so it's not going to change," said Sakakibara, who is currently a professor at Aoyama-Gakuin University in Tokyo.

 

According to Sakakibara, dollar-yen between 90 and 95 would be most favorable for the economy.

 

"I remember in 1998, 1999 — it [dollar-yen] did go to 150 — I was at that time in the government, I was terrified," he said.

Moments ago, it was none other than Takeshi Fujimaki, Soros' former advisor on all matters Japanese, who tripled down on the warnings, and told Bloomberg that the Bank of Japan’s “huge bet” by boosting quantitative easing won’t turn the economy around and is instead sending the nation toward default.

“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

Why? Same reason we have been pointing out every day for the past week, the same reason the Japanese bond market is now essentially broken with daily trading halts becoming an expected feature:

“The volatility in the JGB market as well as the fact that there is large selling represent fear among investors,” Fujimaki said. “They are early signs of a larger selloff and we should continue to monitor the moves in the long-term bonds.”

 

Fujimaki said he recently bought put options for Japanese government bonds of various maturities, without elaborating. He continues to hold real estate in Japan and options granting the right to sell the yen against the greenback expiring in less than five years. He also holds assets in U.S. dollars and currencies of other developed nations.

 

Japan’s finance is sinking into the ocean,” Fujimaki said. “There’s no escape from a market crash in the future when you have such enormous debt.”

And the punchline:

By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

 

“Shirakawa did more than enough and he had good reasons to not do any more,” said Fujimaki. “There will be tremendous side effects from monetary stimulus. QE doesn’t work and has no exit.”

 

Things may look rosy for now as stocks rise, but should we see hyper-inflation, JGBs will see a huge selloff, leading to a stock market crash,” said Fujimaki, adding that he sold “almost all” of his Japanese stock holdings some time ago.

Wow.

And people thought Kyle Bass was bearish.