Is JPY Now Like Oil at $147/bbl?   

• While investors around the world were focusing on the new Obama Administration’s economic stimulus package, the BOJ was slashing their Japan GDP outlook to minus growth of 1.9% iand 2% in FY09 and FY09 respectively, given a “highly uncertain environment in the global and Japanese economies at present. The forecast is more bearish than the government’s forecast of zero growth, and includes deflation in domestic prices until FY2010. This is the worst economic performance in Japan since the 1.5% decline FY1998, heretofore the worst in Japan’s postwar history.
• The three pillars of the Japanese stock market--i.e., electronics, automobiles and banking, accounting for 10.6%, 8.0% and 9.5% of TSE 1 market cap respectively, have horrible earnings fundamentals. There is more bad earnings news to come in these sectors, and stock prices will remain under pressure from rapidly deteriorating earnings fundamentals. Since exports and production, machinery orders, etc. really began tanking from September~October 2008, Japanese companies have yet to get a handle on dealing with the soaring yen, surging inventories and weak domestic demand. This strongly implies that earnings will be a wipeout at least through the first half of 2009 and more likely for the whole year, judging from the BOJ’s scenario.
• Japan’s own economic stimulus of over JPY40 trillion (8% of GDP) is being virtually ignored, even as the BOJ reluctantly begins using its balance sheet to ensure fund availability to struggling Japanese companies. This is because the success/failure of the US $850 billion package and China’s $586 billion package is more relevant to Japan’s export-driven GDP growth.
• The irony is the soaring yen, an illogical move in light not only of rapidly deteriorating economic fundaments, but also of net investment fund flows out of Japan. The culprit is massive yen carry unwinding upwards of JPY20 trillion, by some estimates. But JPY at 80/USD could be like oil at $147/bbl, i.e., extremely overbought. The yen’s surge in 2008 was already the largest move since Bretton Woods, and any return of risk appetite or signs that the yen carry reversal has run its course could send JPY spiraling downward.  Intervention alone however, would not.
• Another caveat is that Japanese stock prices will discount a weaker yen real time.

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