The short yen/long Japanese equities has been a popular position among hedge funds over the last year, at times becoming extremely crowded, and now Societe Generale analyst Albert Edwards has thrown his weight behind the trade despite being long on sovereign bonds for nearly twenty years.
Albert Edwards reverses long-held stance on Japanese bonds
“Although I haven’t yet become a fully paid up member of the Kyle Bass/Dylan Grice/John Mauldin view that the Japanese bond market is ‘a bug looking for a windshield’, I certainly am coming around to their view – and I speak as a long term deflationist who has been overweight long sovereign bonds in my model portfolio since the end of 1996!” writes Albert Edwards.
Japanese government bond (JGB) yields are already at historic lows and Albert Edwards believes that the Bank of Japan is committed to QE until deflation is a distant memory, but there have already been a number of near exits from deflation and experienced investors may be hesitant to assume that this time will be different.
GPIF has no interest in reducing bond allocations
The Japanese Government Pension Investment Fund (GPIF) reduced its target bond allocation from 67% to 60%, but when Prime Minister Shinzo Abe pressured the fund to reduce its target even more (a panel organized by Abe recommended 35%), GPIF president Takahiro Mitani shot back, “Our sole objective is not to invest so that the Japanese economy will be better; our job is to invest the people’s money in a safe and efficient manner so we can protect and manage their funds,” reports Ben McLannahan for The Financial Times.
Albert Edwards says he would jump on the “once in a lifetime major investment opportunity” to unload JGBs, but the GPIF isn’t interested in pursuing riskier returns reflected in the Nikkei’s 20+ years of higher volatility, remarking that those pressuring it to sell bonds don’t understand the nuts and bolts of running an enormous pension fund, and that if it had sold bonds last fall it would just be buying them back now.
The combination of a government and central bank willing to break out of deflation at almost any cost, companies forced to reduce their savings rate as the currency becomes devalued, and wages being pushed up by Japan’s demographic problems (both driving private demand) show why Albert Edwards and others see this as a perfect time to get out of JGBs, short the yen, and start buying up Japanese stocks as the economy, betting that this time Japan really will break out of the deflationary trap.