Here is a longer term look at the Yen chart, which has strengthened further this week, and sent the Nikkei down 3% Sunday night.
We are still long our DXJ and EWJ, although the trades have lagged since we added the positions July 2, 2013.
Potential support exists at $40 on the DXJ and $10 on the EWJ. The positions are down about 10% – not what we had hoped when buying.
Last night, from what I read on ISI Group’s daily note, the Japan consumption tax is being planned for 2014, although offsetting measures such as tax breaks for homeowners are alos being planned to mitigate the economic impact of the consumption tax.
In addition, recent CPI data out of Japan was much stronger than expected, indicating the deflationary grip Japan has been locked in since 1988, is fading. (The only negative with that, is that my expectation for that kind of news would be that the Nikkei would have rallied and the yen and JGP weaken in the face of the inflation news, but no such luck.)
The trading pattern or correlation in terms of Japan’s recovery that have been in evidence since mid 2012:
- Weaker yen – I think the yen needs to trade again over 105 – 106 or the June ’13 highs.
- The 10-year JGB (Japanese Goevrnment Bond) yield needs to continue trek higher, indicative of stronger economic growth;
- Last (but not least), the Nikkei needs to continue higher.
Brian Gilmartin, CFA Portfolio manager
Trinity Asset Management, Inc.