MACRO-JAPAN: We Expect the Unexpected – Part II

Part I of ‘MACRO-JAPAN: We Expect the Unexpected’ can be found here.

Part of the reason we expect further quantitative easing from the BOJ is the intense and now-persistent erosion in Japan’s ‘terms-of-trade’.

Indeed, after preparing the bulk of today’s Money Monitor on Wednesday night, we decided to wait on this morning’s release of the most recent data for Japanese trade, for the month of August. And, as evidenced in the chart below plotting Japan’s Trade Balance, August produced a MASSIVE DEFICIT of (-) 754.1 billion yen, deepening from (-) 518.9 billion in July, and reversing from a surplus of +59.2 billion posted in June.

We also focus on the secular-trend-defining 5-Year Moving Average, which reached a THIRTY-TWO YEAR LOW, while hurtling towards negative territory.

Worse yet, Japan’s trade deficit is the result of a decline in Exports, and a rise in Imports. In fact, since June Exports have fallen by (-) 10.6%, while Imports have risen by +3.9%, with a ‘net’ swing of nearly (-) 800 billion yen.

As seen in the chart below post-2008 Export growth has stalled, and posted a sizable single-month decline of (-) 5.1% during August. We shine the spotlight on the long-term 5-Year Moving Average, which remains in a downtrend, as it has been since the 2008 collapse, reaching a new post-crisis low in August.

Making matters worse, the decline in Japan’s Exports is ‘broad’ based, as it relates to ‘trading partners’, with Exports to the US, the EU, China, and Asia, all, posting a second consecutive monthly decline in August.

Note the August single-month percentage declines in Japan’s Exports:

Exports to US … down (-) 10.4%

Exports to China … down (-) 6.4%

Exports to EU … down (-) 5.0%

Despite the fact that Japanese Exports to the EU fell less than did Exports to China or the US … they made a NEW SEVENTEEN-YEAR LOW, as evidenced in the chart below.

And we observe the chart below plotting Japan’s Trade Balance with the EU, which has fallen into a state of deepening deficit, with the deficits posted in the last four months representing the FIRST EVER Japanese trade deficits with the European nations.

Despite the drag from the real economy, the Japanese stock market rallied on the BOJ policy news, briefly penetrating the August high, and violating the long-term 52-Week EXP-MA.

Still, as evidenced in the chart below, the Nikkei would need to move above the 2012 high at 10,210 (basis nearby futures contract) to confirm an upside technical breakout within the context of the narrowing range, and the pennant pattern in place since the post-crisis high of 11,385 set in 2010.

More pointedly, the Nikkei may offer relative ‘value’, compared to the sub-1% yield offered by the 10-Year JGB, as evidenced in the long-term weekly chart on display below in which we plot the Japanese Stock-Bond Ratio Spread, which remains at historically low levels.

In fact, it would take only a rally to the above-mentioned upside technical pivot point marked at 10,200 to outperform the (non-compounded) return, over ten years, gained by holding Japanese Government Bonds.

Indeed, if the ‘relative yield play’ is a reason to own US stocks instead of US bonds, then this same thought process is even more ‘powerful’, potentially, in Japan. Of course we do note a point of caution, given the fact that a rise in bond yields would likely crush the economy, which would not be ‘bullish’ for the stock market. But then again, we could say the same thing about most countries in the world, including the US.

We will be closely monitoring the price action in the Japanese Yen, for clues as to the impact of BOJ policy as it relates to providing a debasement of the Japanese currency, and/or, as it relates to the potential for further erosion in the trade balance.

We observe the long-term weekly chart of Dollar-Yen, seen below, revealing both a (flat) uptrend in place since the earthquake-tsunami disaster, a violation of the multi-year dollar-downtrend line in pace since 2007, and a sequence of dollar-bullish (yen bearish) divergences generated by the long-term Oscillator.

A move above the August dollar-high (yen low) of 79.58 would also generate an upside penetration of the long-term trend-defining 52-Week EXP-MA, but it would take an extension above (yen below) the June high of 80.65 to confirm an upside breakout in the US Dollar (breakdown in the Yen), a move that would also likely generate a push into overtly positive territory by the long-term Oscillator.

And, finally, we note the upside run in Gold ‘priced-in’ Japanese Yen, in synch with the 2011 and 2012 upside reversals ‘off” the secular-trend-defining 2-Year EXP-MA, and the upside directional reversal by the long-term Oscillator. We are bullish on Yen-Gold, looking for a violation of the double-top marked at 144,732 yen-per-ounce.

We are interested in exploring the short-side of the JGB market on any downside violation of the recent double-low set at 143.48.

We are also interested in exploring the long-side of the Japanese Stock-Bond Ratio, on a move in the JGB below 143.49, as an indirect way of being long the Japanese stock market.

We are interested in exploring the short-side of the Japanese Yen, on any breakdown in the nearby Japanese Yen futures contract below Wednesday’s low of 126.31.

And, we are bullish on Yen-denominated Gold.

In the meantime …

… we remain bearish on the US 30-Year Bond futures, and the German 10-Year Bund futures …

… we remain bullish on the US NASDAQ, with the Dow Jones Industrial Average joining our bullish stance, as of today …

… we remain bullish on Gold, Silver, Copper, and Palladium.

… and, we continue to expect, the unexpected.

Gregory Weldon | Weldon Financial

Greg offers a free, one-time, 30-day trial of three different research publications:
1)  Weldon’s Money Monitor (global macro);  2) The Metal Monitor (precious metals markets) and 3) The ETF Playbook. Click the link below to sign up for a free trial and gain immediate access to Greg’s latest research including this week’s Macro-Market ‘audio’ Metal Monitor which covers the Fed, ECB, Gold, Silver, Currencies, and more!

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