Kyle Bass, managing partner of Hayman Capital Management LP, said in an interview with Richard Solomon of the Beacon Reports that now it's checkmate in Japan. He says the Japanese government has ruined its finances to a breaking point, and Japan may be the first developed country to witness financial meltdown. Bass is known for correctly predicting the subprime mortgage crisis, making more than $500 million for his firm in the process.
He says investors have been prepared to shift their assets to the safety of Japanese government bonds in the event things turn ugly. But now their psychology is changing given the Bank of Japan's aggressive stimulus program. Under the plan, the BOJ is purchasing more than 60 trillion yen of government bonds a year for the next two years. That will double the monetary base of Japan. Kyle Bass says Japan's annual fiscal deficit is expected at 50 trillion yen for the next two years. That's about 11 percent of GDP, leaving BOJ to only buy another 10-12 trillion yen of bonds. Bass doesn't think that cushion is sufficient to monetize the entire fiscal deficit.
Kyle Bass says the biggest question is whether the central bank of Japan will be able to hold on to rates. It can in the short term, but that's impossible in the medium and long-term, says Bass.
Kyle Bass' Tips for Investors
Investors living inside Japan should act assuming a much weaker yen going forward. Investors who have their savings and income in yen should put their savings into some other developed nation's currency (or basket of currencies) because Japan's debt problem is bigger than any country on earth. That way Japanese investors can maintain their purchasing power. They haven't witnessed the full effects of yen devaluation. Kyle Bass says within just six months the prices of finished goods will start rising as input prices are increasing.
But if a Japanese investor has his money in a domestic company that benefits from a weaker yen, they will be far better off. Kyle Bass advises Japanese investors to focus on companies that export a lot to other countries and sell in foreign currencies. And stay away from those firms that focus on domestic sales or export little.
Companies like Toyota Motor Corporation (NYSE:TM) (TYO:7203) and Nissan Motor Co., Ltd. (ADR) (TYO:7201) (OTCMKTS:NSANY) are likely to benefit from the yen depreciation. Companies that import a lot more than they export are likely to suffer.
If you live outside Japan and want to invest in the world's third largest economy, you should be doing the same thing that Kyle Bass recommends Japanese investors do. Bass also suggests the idea of hedging your yen position.
Kyle Bass is an investor of international repute. His hedge fund has given 25 percent average annual return after fees since 2006.