Japan investors ready for bumpy ride aboard the 'Abe trade'

Dec 13 2012, 13:41 IST
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SummaryThe net yen short position in the futures market hit its highest level since mid-2007.

Printing money and going on a spending spree would usually sow alarm in a heavily indebted economy, but investors in Japan are betting that opposition leader Shinzo Abe will tone down his strategy if he wins power in Sunday's national election.

Made a firm favorite by opinion polls to become the next prime minister, the Liberal Democratic Party (LDP) leader wants to step up aggressive monetary easing along with heavy public works spending to help Japan escape years of deflation and make the yen more competitive so that a spluttering economy can start motoring again.

His policy prescriptions, dubbed "Abenomics" by the media, and his threat to curtail the Bank of Japan's independence, have sent a chill through some quarters of the central bank.

But investors see some merits in the strategy, and reckon the responsibility of power will prevent Abe taking excessive risks that could lead to a bond market meltdown.

"Japan could be the only industrialized country to be able to pursue a reflationary policy mix of monetary accommodation and fiscal expansion," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

That prospect has led to a wave of yen selling that currency dealers are calling the "Abe trade".

The yen, currently trading around 82.85 to the dollar, has fallen some 4 percent since the election's announcement in mid-November, bringing some relief for Japan's suffering exporters.

Over the same period, the Nikkei's benchmark index has gained 10 percent.

Meanwhile, the benchmark 10-year Japanese government bond yield hit a 9-1/2-year low of 0.685 percent last week after holding steady around 0.7 percent for months.


The combination of a weaker yen, rising stock prices and low bond yields could help lift Japan out of its fourth recession since 2000, analysts and economists say.

The persistently strong yen has wiped out manufacturing competitiveness and spurred companies to relocate overseas, chipping away jobs and further aggravating the low-grade deflation that has dogged Japan's economy for two decades.

The low-and-steady yields in the Japanese government bond (JGB) market represent a consensus that Abe can steer the central bank toward a sharp increase in its bond purchasing without triggering runaway inflation or a financial panic.

And there is growing acceptance both in markets and inside the BOJ that the aggressive easing Abe talks about will not amount to a "big bang" in central bank policy.

But Abe's honeymoon with the markets could end badly if investors became alarmed over any danger

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