Kleinheinz Capital: Japan in Catch-22, Will Ease or Weaken Yen


Kleinheinz Capital Management is an asset manager with cover $2.0 billion under management. The firm which has a value oriented appropriately calls its flagship fund; Global Undervalued Securities fund.

The firm’s flagship fund was down a whopping 27.19% for 2011. While the S&P500 was flat for the year, the fund bogies itself against the MSCI Emerging markets index, which was down over 20% for 2011. Additionally, despite the underperformance in 2011, Kleinheinz has returned a whopping 22.5% per annum since inception close to 15 years ago. The fund is up 1.61% in March and  7.77% this quarter.

The fund discussed a lot of issues in their quarterly letter and had some interesting thoughts on Japan. They believe that  Japan’s structural debt dynamics have become so severe that they may force the hand of the government to act in ways that will weaken its currency simply due to self-preservation. It is widely known that Japan’s public debt is now more than 200% of GDP. Given the high debt burden, interest rates do not need to go to 4% to cause problems. On $11 trillion in debt, a 200bp rise in interest rates would bring debt servicing costs to 4% of GDP requiring an additional ¥20 trillion. Since Japan simply can’t afford interest payments this high, they will likely resort to further quantitative easing or an “operation twist”, like the U.S., in order to hold interest rates down – both of which would have a weakening effect on the Yen.

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The bottom line is that whether the Japanese government weakens the Yen to support its manufacturing base, or engages in quantitative easing to control increased interest payments that it can’t afford, the evidence is building that we are at the early stages of a weakening trend for the Yen.


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