Bearish Yen, Bullish Japanese Stocks   

• Manufactured or not, the profits being reported by major financial stocks like Wells Fargo (WFC) and Goldman Sachs (GS) have had a soothing effect on investor nerves, reducing risk aversion. Surveys show investors are putting cash to work particularly in basic materials and emerging market equities.
• Whether this is a “bear trap” or not only time will tell, but a convincing break-down of gold will be indicator of a more sanguine view of global financial fragility even though the high profile bears (George Soros, Marc Faber, Nouriel Roubini, et al) are far from convinced.    At the end of the day, our vote is for “king” copper’s predictive abilities, and the price action here remains encouraging.
• While still near the lowest point the index has been in 30 years, Japan’s Nikkei 225 is still basing for a golden cross between its 13-week and 26-week moving averages, which historically has been a signal for a sustainable rally. Granted, a golden cross was seen in July 2008 just ahead of the major sell-off, but the 26-week MA was already falling by that point, thereby invalidating the signal.
• Export stocks, particularly the auto stocks, have rallied the strongest as the yen traded back toward JPY100/USD, a key psychological turning point for the currency as far as stocks go. A backing away from the JPY100/USD level has triggered some profit taking, but we do not view this as a major trend reversal back to a strong yen. A heavy issue calendar of new JGBs that the BOJ will inevitably have to purchase more of, and the revival of global currency carry trades should work to keep the yen in a weaker trend for the foreseeable future.
• Consequently, we are bearish yen, bullish Japanese stocks.
• While there is still much doubt about how real the recovery in China is, the majority of Japanese companies with boots on the ground are seeing a bottoming-out of China’s economy, and expect to see recovery forming by September. Thus China is now a supporting factor for Japanese stocks, particularly basic materials stocks, even though Japanese companies also appear to be getting their electronic component inventories under control.

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