The Yen Short is Back in Play

This note is a guest contribution by John Thomas, of MadHedgeFundTrader.com.

June 3, 2010

The Yen Short is Back in Play. The surprise resignation last night of Japanese Prime Minister, Yukio Hatoyama, has suddenly thrust my yen short back into the limelight. Coming in on a landslide only eight months ago, the hapless leader of the left of center Democratic Party of Japan (DPJ) couldn’t help but stumble over his own feet. In the end, he was done in by his failure to deliver on a key campaign promise and close the US Marine Corps base at Futenma in Okinawa, which took his approval rating down to a subterranean 17%. There was never a chance that the Americans were going to depart.

A US military presence there is guaranteed by the US-Japan Security Treaty, and has recently become more crucial in the face of a saber rattling North Korea and a militarily ascendant China. Not only is the base the headquarters of the Third Marine Division (my Dad’s), the US took 50,000 casualties taking the island in 1945 after an epic 82 day battle, and they are not about to give it up lightly.

The interesting play here is that Hatoyama’s expected replacement, finance Minister Naoto Kan, has been very vocal in his support of a weak yen policy. The yen has already backed off two full handles on the news, boosting the ProShares Ultra Short Yen ETF (YCS) along the way. With the long-term demise of Japan a sure thing for me, I knew the yen had to resume its down turn, once a global risk reduction and carry trade unwinds get out of the way.

QUOTE OF THE DAY

“80% of the world’s GDP growth last year came from stimulus. It’s not real. Our current debt/GDP is 360%, we have $55 trillion in total debt, and $108 trillion in unfunded liabilities. I think not only are we are going to hit the old low, but there is a pretty decent chance we are going to make a new low,” said Ron Carson of Carson Wealth Management.

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