Next Turning Point for Japan is a Peak in JPY     

• As we stated last week, there will be no Christmas cheer for Japan, at least until the next wave of megabank and other company capital calls, as well as the strong yen, passes. Last week, renewed global credit concerns in areas such as Dubai and Greece only exacerbated the already negative supply-demand picture for Japanese stocks.
• Technically, the Nikkei 225 and Topix benchmarks have fallen below their 200-day moving averages, indicating an extended correction in Japanese stocks as foreign investors again take profits. Thus we remain underweight Japan equities versus global benchmarks, and particularly underweight Japan's capital hungry big three megabanks as well as currency-sensitive sectors. Until JPY confirms its secular peak, we see downside risk in the Nikkei 225 between 9,000 and 8,000 as investors discount the GDP and corporate profits lost because of a strong yen in FY2009 and FY2010.
• As we have outlined in previous TJI market letters and other forums, Japan's debt situation is already dire and could get even worse before it gets better. However, we would caution against "time stamped" bets against JGBs, because still cash-rich domestic financial institutions can probably support JGBs for longer than foreign investors can afford to lose money on short JGB positions.
• But since the final (parabolic) run-up to a new historical high of JPY79/USD between 1990 and 1995 quickly reversed back to a level weaker than JPY100/USD in just three months after the peak, the reversal back to a profitable export level of JPY100/USD or weaker could happen fairly quickly given the right trigger, such as a shift in monetary stance by the US Fed, or a serious attempt by Japan’s monetary authorities to turn deflate the yen.
• However, while finance minister Fujii noticeably turned up the verbal intervention volume and the BOJ was making rate checks last week, unless Japan can convince the US or other governments to coordinate intervention, currency traders will probably continue to test the DPJ government's resolve. Further, while the BOJ could turn the tide with a monetary policy shift toward goosing the money supply, they have so far strongly resisted  such pressure.

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