Japan – Like Zimbabwe?

I’m a big fan of buying bombed out sectors, but only where a catalyst to change the environment for the better is evident. Zimbabwe qualified a couple years ago, and still does. Japanese equities certainly qualify today as well.

When I look at Japanese equities, the case can certainly be made that they fall into the “bombed out” category.

Zimbabwe – bombed out but on the up

The TOPIX dividend yield is over 2%, while the yield on the 10-year JGB’s are sub 1%. In fact the TOPIX dividend yield is higher than that of the S&P 500 for the first time in many years. In a low interest rate world investors are increasingly yield hungry. Japanese equities certainly qualify as being attractive from that perspective.

The Price to book ratio on the TOPIX is below 1x with many of these companies selling for less than book. In fact, about 3 weeks ago they were trading at 0.65x book when I took the opportunity to add to an existing position. Why such low valuations? This isn’t Kabul, Afghanistan or Homs, Syria. It’s more like Zimbabwe’s equity market… bombed out and undervalued.

Japan and Zimbabwe share another similarity – the currency realm. Zimbabwe is simply some years ahead of Japan. The BOJ has recently indicated an inflation target similar to that of the US Fed, and achieving this target will entail additional quantitative easing. Zimbabwe of course quantitatively eased themselves into abject poverty, but those who saw what was coming and positioned themselves ahead of it did extremely well during what was for most a terrible time.

The actions of the BOJ will weaken the Yen, which will be supportive of Japanese equities in particular. This is because Japan is still an export powerhouse, and a weakening Yen will expand profit margins. Japanese equities are not priced for this reality.

This is something we discuss in our FREE report on Profiting from the Japanese Debt Crisis, which all subscribers received yesterday. If you’re not a subscriber you can get the report by clicking here.


Successful investing is simple. Not easy, but simple. Risk and reward are the two components one needs to evaluate. Let’s begin with risk first.

Japanese equities are the most under-owned asset class amongst its citizens at any time during the last 20 years. As mentioned above they are throwing off higher dividends than 10-year bonds. Think about that for a minute.

Conversely, citizens are the most heavily invested in JGB’s than they have been at any other time. The Yen is still at multi-year highs against the dollar. The boat is heavily tilted on both of these fronts. How much more tilted can it get? I don’t know, but not much more in my opinion.

There are few marginal buyers for Yen and JGB’s, while there are few marginal sellers for Japanese equities. As such the risks to buying Japanese equities here are sufficiently low for me.


QE from the BOJ, weakening the yen and pushing inflation higher, will send capital into equities without a doubt. Given the cheap valuations discussed herein, the reward side of the equation looks pretty favorable. As we discuss in the aforementioned Japan report,  monetization of debt is the politically feasible strategy. Once sellers emerge for JGB’s though, its not hard to understand that monetization can and will take on a life of its own.


While I think the potential for Japanese equities to outperform is high, the really out-sized potential exists in the Japanese bond market.

If we run some math on a Greek-style move in bonds, and then remember that “holy crap we’re not dealing with a tiny almost meaningless little Mediterranean rock, but rather the world’s second largest bond market,” its not hard to come to the same conclusion that our friend Tres Knippa has come to. Namely that this trade if managed correctly, could exceed 100x.

Tres manages, on a daily basis, a trading strategy which significantly reduces the risk of holding short-dated options while at the same time positioning himself and his clients for the upside. If like us, you don’t have the time to sit staring day in day out at your trading screen, yet want to partake in what we believe will be a trade for the record books, then  do yourself a favour and read the interview with Tres in our report or just get a hold of him direct here.

One thing is certain: something which is unsustainable will not be sustained. Zimbabwe showed us this and so will Japan.

Today I have an absolute gem of a quote for you direct from none other than Zimbabwe’s central banker Gideon Gono, the man who managed to completely destroy the Zimbabwe dollar. His words sound eerily familiar to those spewing forth from his counterparts in the West; in fact, I could quite easily use the below quote, and instead place Ben Bernanke’s name at the end, and I suspect most readers would not blink an eye.

Have a wonderful weekend!

– Chris

“This is the darkest hour before dawn and we should never underestimate monetary authorities’ ability to deal with the adversity.” – Gideon Gono


This Post Has 2 Comments

  1. Paul

    I liked your Japan report – however, I’d like you to address what Hugh Hendry sees for the JGB’s and the Yen. I respect Hugh Hendry and he thinks that both could soar in the next year or two.

    “Japan is confronted by a European sovereign-type loss of confidence in the JGB market. We bought protection on steel names, and also on businesses with a huge sensitivity to the yen. I think the yen could soar from these levels [about 79 to the dollar] into the 60s, if not the 50s, with further dislocation in European sovereigns or a China hard landing.

    From the early 1960s almost, Japan began recording current-account surpluses. Unlike Germany, it always invoiced in dollars.

    So Japan is short its own currency, and has an enormous private-sector hoard of foreign assets. If the Nikkei falls, and your hedge and private-equity funds fall, pension funds in Tokyo will have fewer yen assets, but their liabilities will be the same. So they’d have to sell some overseas dollar assets and retrade them back to yen. If we have a series of bad events from China to Europe, that will express itself in a very strong yen rally.”

    1. Chris MacIntosh

      Hi Paul

      Apologies for the late reply. I’ve been away and out of technologies reach. I’ve thought a lot about Hugh’s ideas and they appear to me to centre around his very bearish stance on China. I actually think that a hard China landing could have the opposite effect. Remember China is Japan’s second largest trading partner. I would argue that a hard Chinese recession would translate into a trade deficit for Japan further pressuring inflows of capital required to sustain the Budget deficit and purchase of additional JGB’s. Hugh may be correct, however I think that the margin for error on the opposite happening is so ridiculously small that I’m forced to bet against the Yen.

      At the end of the day none of us KNOW what will happen, even those newsletter writers who profess the know for sure everything and conveniently gloss over past screw ups with more hype. Its a matter of using what knowledge we do have, taking a position, questioning that position continuously and above all Managing that position.

      We will be watching this market very closely though and I thank you for playing devils advocate. It’s one of the most valuable things that one can do in my humble opinion.

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