Increasingly we have come to believe that the real marginal economy over the next several quarters will be neither that of the contracting US, nor that of the rapidly tightening, yet still very much inflationary China, but the (arguably) third largest one: that of Japan. Over the past month we have suggested that in addition to already latent deflationary tendencies, the recent post-earthquake collapse will require a dramatic, and very political intervention in BOJ monetary policies (here and here), in order to avoid a global contraction. Yet as David Koo proposed yesterday, the (infra)structural changes will demand an overhaul so profound that the contraction will be not only severe but likely very extended due to spillover effects into energy commodity demand, thus creating a non-virtuous feedback loop. So for those who are still new to the Japan story, below we present an extended presentation compiled by The Tail Chaser blog which compiles the relevant bits and pieces on the Japanese economy to scare even the most optimistic fan of the land of the setting sun (which certainly is not Dylan Grice who recently suggested that a very possible outcome is a Weimar repeat as the BOJ takes the von Havenstein route to excess debt resolution).
As the Intrigued Trader over at Tail Chaser says:
The data presented was sourced from a variety of entities and might not be 100% accurate/on the spot, but it sure gives you a very good idea about where Japan now stands in terms of growth potential, debt sustainability and risk-reward. It hasn't been updated to include after-earthquake/tsunami economic data and governtment/central bank response, however these tragic facts only make the case even more interesting. In my opinion they only increased the probability of my desired outcomes.
At the end I presented trade ideas that, together, from what I call the pillars for the bet against Japan.
Pricing has, of course, changed since then, but not a lot. As others have mentioned, the asymmetry is huge.
The final word on this trade is simple: confidence. If the music stops for JGBs, Japan could be gone quickly.
And for those who enjoy chasing black swan trades, nobody proposes better risk/return scenarios than Dylan Grice (here). In the meantime, here is all you need to know about Japan.Japan Tail Chaser