Strategies for Speculating on the Crisis in Japan

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Bears on Japan are finally, after nearly two decades of being on the wrong side of the market, getting some vindication. The end of 2012 was marked by a significant decline in the Japanese yen and a rise in the yield on 30-year Japanese Government Bonds (JGBs). The charts below illustrate those movements.

Should those trends continue, the conventional wisdom is that investors will do best by shorting JGBs. But a superior strategy is to short the yen itself.

I’ll explain my investment thesis, but first let’s look at Japan’s fiscal situation and why it is likely to deteriorate in the near term.

Japanese yen, as measured by its corresponding ETF (FXY) Japanese yen, as measured by its corresponding ETF (FXY)

30-year Japanese Government Bonds 30-year Japanese Government Bonds