Japan: why are you wasting your time and money II

We noted last week that subscribers have saved plenty of money by avoiding Japan, on which we have had a "Sell" for a long time.

Indeed, the only positive is that the yen must keep strengthening in the wake of America's Countrywide Financial Corpse, which will lead to more and more unwinding of yen carry trades. Indeed, Britain's bank, Northern Rock PLC, recently turned to gravel, too. And Germany's Landesbanken are sliding. So watch investors get more risk-averse and unwind their yen carry trades even more.

Japan's sluggishness is worsening, what with political developments leading the country nowhere. That lack of direction must keep taking its toll on growth. Below we discuss more recent political developments that are harmful. Why not review our fresh update of The Economic Clock for Japan? That way you can get a concise analysis of why we remain so leery of economic developments, too.

We would adjure you to beware of today's market rally in Japan: we argue that the 50 basis point Fed Fund rate cut cannot stave off a cost-push stagflation which the US is facing...all of which means: don't trust that rally in Japanese exporters, all the more with the yen getting stronger...


Even though Prime Minister Abe resigned last Wednesday, we do not believe that there is light at the end of the tunnel in Japan.

Even though he has resigned, the opposition Democratic Party of Japan (DPJ) did win the majority of the Upper House this July. This means that whoever takes over the helm:

  • Opposition still rules the Upper House. He (this is Japan, don't forget, so women unfortunately have no direct say) will represent the 52-year old establishment, the Liberal Democratic Party (LDP). This means that the LDP will have to keep fighting it out with the opposition DJP in the Upper House. This means that the "anti-terrorism bill" - whereby the LDP wants to be able to continue fuelling U.S. and allied warships in the Indian Ocean;

  • Taint of scandal remains. The LDP will have enormous trouble pushing legislation through. Abe left office inter alia because of his party's many possible scandals that may surface later, according to the media. If this turns out to be true, expect any revelation of scandal further to hurt the moral authority of the LDP, and

  • Lacking focus. Mr. Abe focused on restoring Japan's glory after her defeat in World War II; however, the population was keen for him to get the economy going again by focusing on pensions, health care and worsening wealth inequalities. He did not deliver, and it seems as if many in the LDP won't deliver on this vital necessity either. This is but one reason why the DPJ must have lost in the Upper House...

Thus, even if we can expect a new PM this week - don't expect the political quagmire to dissipate. Indeed, the LDP wants to hold a General Election next year - but if the party remains as divided as it is currently, expect the ship Japan to float around rudderless for a long time: there is too much factional fighting within the LDP.

Then there is the matter of the other top job replacement, the next Governor of the Bank of Japan. How will this affect the yen and markets?

Thoughts About the US

The rate slash means that the Economic Time in the US is worse than commonly thought.

We, along with many others, were surprised at the severity of the Fed's decision yesterday: it cut the Fed Funds rate by 10 percent, from 5.25 percent to 4.75 percent. But while markets were ecstatic - we are skeptical. See how subscribers will earn money off this current economic juncture.


Why did the Fed cut rates so severely? Normally the Fed raises as well as cuts rates in baby-step intervals of 25 basis points. To paraphrase Deng Xiaoping: this is how the Fed "crosses the river by feeling the stones". In this case, it appears that the Fed simply leapt into the river with both feet.

So why did the Fed slash rates so vehemently? We reckon that the Fed is gauging the depth of the subprime mess to be far deeper and with a far greater "reach" globally than markets wish to accept at present. Indeed, Countrywide Financial Corp. has morphed into Countrywide Financial Corpse, and Northern Rock PLC has morphed into Northern Gravel PLC. Not to mention what various Herr Direktoren in some of Germany's Landesbanken are going through...

This is but one reason to expect a US market crash this October