2010 Surprise? Expect Japanese Equities to Outperform
by Brian Kelly January 05, 2010

On CNBC’s Fast Money New Year’s Eve, I was asked to give my “surprise” for 2010. What was it?

Japanese Equities outperform all other markets in 2010.

• There are three pillars supporting this view:
• The Japanese Economy is Just “Good Enough” to Support Govt. Debt
• The BoJ Has Just Begun Quantitative Easing
• A Liquidity Fueled Rally Could Ensue

“Good Enough”

One of the only data points for Japan last week was the release of Japanese Industrial Production. The number was nothing short of fantastic as the monthly change:

On the stellar numbers the Yen went absolutely nowhere! The markets have interpreted the number as good enough to keep Japan out of debt service trouble. However, most of the gain was due to exports to Asia.

Quantitative Easing
Domestically, the economy is still weak which should give the BoJ the political fuel they need to keep rates low and fight deflation via quantitative easing. The economic developments in Japan are playing out very similarly to the United States in March 2009. Industry is ramping up as a result of government spending, but has yet to filter into the domestic economy.

Like the U.S., we expect the Japanese currency to weaken as quantitative easing gains traction and the U.S. dollar carry trade is unwound in favor of the Yen carry trade.

Liquidity Fueled Rally
A weaker Yen supports Japanese exporters and will likely be embraced by both the BoJ and the Japanese government. What’s more, an improving economy, especially China, will add to exports and help Japanese companies. The combination of low interest rates and improving export prospects could fuel a rally similar to the one experienced by the U.S. since March 2009.

Disclosures: We are short Yen v. long U.S. Dollars via a short position in FXY and Long EWJ

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