Japanese Economy Comments / Trade Idea

Many have compared Japan to the Eurozone, citing Japan's huge debt to gdp ratio (200%+) as an impending risk to the Japanese economy. Although I agree that Japan's large amount of debt is definitely detrimental to their economy, I do not think that Japan will turn into a Greece, or Spain.

Why? Well the most important factor is Japan has a central bank! At any point in time, Japan can print their way out of their debt. Obviously if not done in a controlled fashion, this would create huge inflation which would make matters worse, but when push comes to shove, Japan always has the printing press as a weapon at their disposal.

Individual countries in the Eurozone however do not have the power to print their own money. The only way for a country such as Greece to solve their debt crisis is to raise capital!...or borrow more (not a long-term solution as we have all come to realize). This brings us to the problem that has plagued the Eurozone: individual countries are unable solve certain economic problems due to their "hands" (and currencies) being tied.

Back to the Japanese economy, the Japanese benefit from a lower currency as they are large exporter (and creditor). The Japanese economy has also seen deflation (negative inflation) for the last 20 or so years and so printing money in the end may be a good idea. The main risk to this occurring is obviously the possibility of hyper-inflation, though unlikely.

In my opinion, the Japanese will not turn into a Greece, as long as they have the printing press on their side. Japan can only default on it's debt if the country lets it happen. However, we would need a significant contraction to see the printing presses start up in Japan, given the deemed failure it was in the early 2000's. For these reasons I think shorting the yen and purchasing Japanese equities (after a further decline below 7000 on the Nikkei 225) would be a good trade given Japan's debt. By purchasing Japanese equities and shorting yen, you are essentially negating the effect of inflation as your profits in equities may be less in real terms, but the profits in yen shorts make up for it.