Another Lost Decade for Japan

02/26/2009 10:46 am EST

Focus: ETFS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy and Asia Edge, warns that Japan’s economy will worsen and its markets will go lower, so he recommends betting against it.

Make no mistake about it—the Japanese economy is toast.

The country is not only facing the worst economic crisis since World War II but also another lost decade.

And the decline has already started:

  • Japan’s exports plunged 27% in November, the most on record, as global demand for cars and electronics collapsed.
  • Shipments to the US slid an unprecedented 34%, and
  • Sales to China have cratered, slumping the most in 13 years!

And because Japan is nearly 100% reliant on exports, especially to the US and China, the worst is clearly yet to come.

Especially when you consider that Japan’s strengthening currency—which rallied about 20% against the dollar in 2008—is simply crushing Japan’s biggest exporters.

Why, according to Honda Motor (NYSE: HMC), every one-yen gain against the dollar cuts its annual operating profit by 18 billion yen ($200 million).

This is why Toyota Motor (NYSE: TM) forecast its first operating loss since the company formed 71 years ago, due to the strengthening yen and weak global demand. Sony (NYSE: SNE), Nissan Motor (Nasdaq: NSANY), and NEC (OTC: NELTF) are warning of huge losses that will eliminate tens of thousands of jobs.

To top it off, Japan’s 2008 fourth-quarter GDP contracted by 12.7%, and their market is expected to collapse even further.

Yoshiki Shinke, an economist for respected Dai-Ichi Life Research Institute, says, "It’s very likely we’ll see another double-digit decline for the current quarter."

When you add everything up, one thing is clear: The worst is yet to come.

  • The yen’s gain of 18% against the dollar will continue to cripple the country’s exports (although it has retreated from its highs against the dollar recently—Editor).
  • The pace of decline is exceeding the market’s gloomiest predictions, with the country now reporting the deepest slide since the 1974 oil embargo.
  • The Japanese public has lost faith in its economic leadership, with the approval rating of Prime Minster Taro Aso falling below 10%!
  • Japan’s stimulus package is a joke—not built around an infrastructure plan like the US has in place, but around $130 to $220 cash payments per person.

Just ask Japan’s own economic and fiscal policy minister Kaoru Yosano. He warns in the Tokyo press that a rebound is all but impossible before the global economy improves.

With Japan’s economy facing another double-digit decline for the quarter, we are not only officially out of the Japan market, but are embracing a shorting strategy here to add to our profits.

(Editor’s Note: The UltraShort MSCI Japan ProShares (NYSEArca: EWV) is an ETF that moves twice as much in the opposite direction as the MSCI Japan index, so it will rise two percentage points for every percentage point that index falls. As a leveraged short ETF, it is only for risk-tolerant investors. EWV closed above $104 Wednesday.)

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