During this week's Invast Insights we cover: ► Japan's economic problems ► Long term implications of Japan's decisions ► Abe's influence on the Dollar Yen GRAB A 4 WEEK INVAST INSIGHTS FREE TRIAL (WEEKLY NEWSLETTER) http://invast.com.au/insights CONNECT WITH INVAST TODAY Facebook ► https://www.facebook.com/invastglobal Twitter ► http://twitter.com/InvastGlobal Linkedin ► http://www.linkedin.com/company/invast Invast ► http://www.invast.com.au Google+ ► https://plus.google.com/+InvastAu/

1. 1
• Japan's economic
problems
• Long term implications of
Japan's decisions
• Abe's influence on the
Dollar Yen ​
This week…

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General Advice & Risk Warning
Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or
advice given does not take into account your particular objectives, financial situation or needs.
Therefore at all times you should consider the appropriateness of the advice before you act further.
CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You
can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment
objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are
for example only. You are reminded that past performance is not indicative of future performance.
Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product
Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you
decide whether or not to acquire any financial products. These documents are available at www.invast.com.au
Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:
• Japan's economic problems
• Long term implications of Japan's decisions
• Abe's influence on the Dollar Yen

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Dear Readers,
As we wrote last week, this month’s reports will be structured as follows:
Key theme 1 - Week commencing 1 December 2015: Watch closely what happens to
Apple shares.
Key theme 2 - Week commencing 8 December 2015: Watch closely what happens to
European shares.
Key theme 3 – Week commencing 15 December 2015: Watch closely what happens to
Japan’s Nikkei.
Key theme 4 & 5 – Week commencing 22 December 2015: Key energy losers & their
lenders.
Key theme 3 – Week commencing 15 December 2015: Watch closely what happens to
Japan’s Nikkei.

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We wrote last week about the European economy and the need for Germany to dig
deep and pull the rest of the economic zone out of a deep slumber. We spoke about the
willingness of the ECB to act and the capacity for Draghi to pursue more action in the
New Year, even though the market was starting to question his resolve. We pinpointed
several Germany stocks, all members of the DAX30 index, which we thought had strong
positive leverage to a falling Euro against the US Dollar and lower energy prices.

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Our discussion this week is on Japan, probably in a similar
situation to Europe, but one which has now last for
almost two decades. Japan’s economic problems aren’t
new but they are important. As we write this note an
election is due to take place. We assume that Abe is
successful by the time you read this note. The market has
priced in an Abe victory as very likely and so we don’t
really see any major shocks.
Our focus is more on the long term implications of Japan’s actions and the direct
impact this has on the Nikkei, which touched six year highs this year and the
continuing depreciation in the Japanese yen – one of the most highly traded currencies
globally.

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Our note this week is a little different in style, it contains more of an “economic focus”
than usual. But we think it is very important to have a sound background into one of the
world’s largest economies. Japan has the potential to surprise on the upside of become a
huge global financial shock within the next few years. If you are trading markets, having
a firm understanding of what is occurring in Japan is paramount to your results.
Before starting our discussion on Japan this week, we would like to remind our readers
that they can always send in their feedback on our notes and analysis. We haven’t
received much feedback this year and we want to make sure you are reading these notes
intently. Not everything we write is perfect but we try our best to provide you with an
overall framework around your thinking as a trader and investor. Drop through any
feedback on our reports or requests for 2015 to support@invast.com.au.

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Japan’s recession – something to worry about?
We aren’t losing sleep over the technical recession which was recently reported after
Japan’s third quarter growth rate fell compared to expectations of a modest rise. Japan
pushed through a significant increase in sales tax during the second quarter, which was
reflected in the GDP contraction, purchases and consumption was brought forward in
the first quarter which inflated the numbers. GDP for the July to September quarter was
recently revised down to an annualised 1.9% contraction rate from the previously
reported 1.6% annualised contraction rate.
The surprise in the third quarter in itself suggests one real quarter of negative growth. If
the first and second quarters were evened out, the rate of growth would have somewhat
moderated.

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Stills, it’s not positive. The next increase in the sales tax will now be pushed out and Abe
has taken this to an election so that his mandate for economic reform – commonly
called Abenomics – is reaffirmed. If economic growth contracted because of the
introduction of the sales tax, we see this as a short term blip in fixing a long term
problem. The sales tax is needed to help Japan fund its ballooning debt burden and
upcoming reforms which are yet to take place. For us, the most important questions are
how much further can the debt burden grow before the markets starts to completely
freak out.

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How much debt does Japan really have?
The numbers in isolation look scary. Since the early 1980s, the private sector has been
deleveraging (causing the sluggish growth situation) while the public sector has seen a
huge increase in its absolute debt levels. Recent estimates put Japan’s gross government
debt as a proportion of GDP at around 237%. But, the next figure is somewhere closer to
135%, still extremely high and only likely to continue growing as quantitative easing
ramps up on an unforeseen scale.
The introduction of the steep sales tax announced this year is one measure in trying to
address the debt load. It is an extremely difficult balancing act. After suffering from
years of ongoing deflation and the horrible consequences of the Tsunami Disaster in
2011, inflation finally returned in 2014 before albeit at a pace much lower than the Bank
of Japan’s desired 2% level.

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According to Bloomberg “…About 15.6 percent of Japanese tax revenue goes to pay
interest on this debt every year -- about the same as for the U.S. This is a moderate
burden on government finances, but one that would quickly become unsustainable if
interest rates were to spike…” We don’t see this as a short term issue as rates will only
start to rise on inflationary pressure and inflation is nowhere near the 2% BOJ target rate
yet. Inflation is also not an issue in the United States and with falling energy prices,
global economies have less imported inflationary pressures before adjusting for their
currency cross rates.

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Most economists include economists Takeo Hoshi and Takero Doi agree that Japan’s
government revenue would need to rise to around 40% of GDP in order to meaningfully
start addressing the debt issue. We came across this academic paper which both
economists wrote in 2011. A lot has changed since then, but our analysis here is based
on many of their findings.
Taxes are now around 28% of Japan’s GDP, this is before government expenditures which
sees fiscal deficits currently in the order of around 8% of GDP. This explains why the sales
tax measure is so important and Abe needs to strike a tough balance between imposing
this and managing to increase inflation through modest rates of growth. The 12% sales
tax limit is only the beginning and has so far proven to be very politically difficult to sell
in its entirety.

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A lower yen is the key to short term problems
Without going into a complete economic essay, we think the only real solution to Japan’s
economic problems is to continue devaluing the yen and start to push for inflation as
much as possible, without completely blowing out the government’s balance sheet
capacity. A falling yen against major peers will not only add imported inflation but
continue to assist key multinational conglomerates which form part of Japan’s important
export economy. This is very similar to the situation in Europe which we spoke about last
week.

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Image: USDJPY weekly price chart via Invast MT4 platform

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The weakness in the Yen has become a major boost for the corporate earnings of many
Japanese multinationals – these are the companies which will start to invest in
resources and staff. Japan’s unemployment rate is already very low by global
comparisons but the amount of investment intensity by the private sector is the key
issue. The risk aversion has seen bond yields slump and in turn reduce inflationary
expectations. A windfall in export earnings could become a major boost for this spiral
effect.

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We think the Yen will continue to weaken against the US dollar for the three following
reasons:
1) Assuming Abe’s re-election, this will rubber stamp his authority to pursue his stimulus
plans;
2) The Bank of Japan is too far down the road to turn back;
3) The US economy, aided by falling energy prices, can no longer maintain its currency
weakness and will have to start dealing with interest rate rises at some point in 2015.

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The weakness in the Yen has seen the Nikkei 225 post an 8.8% year to date return as of
the time of writing. We estimate the Nikkei 225’s price to earnings ratio at around 26x
which implies an earnings yield of around 3.8%. This might seem high on face value but
is still attractive when compared to Japanese government 10 year bond yields at 0.40%
and 30 year yields at an amazing 1.37%. In order to achieve a 2% target inflation rate,
we would assume that the 10 year yield would need to at least double or rise
somewhere in the order of 1% from 0.40% currently.

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Image: JP225 daily price chart via Invast MT4 platform

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There is still huge scope for earnings growth on the Nikkei 225. The chart to the left is
sourced through Google finance, it shows that the Japanese market might be at 6 to 7
year highs this year but still considerably below the 2000 peak and way below the
almost 40,000 level touched towards the end of the 1980s.
As the yen falls and the earnings impact flows through the market, Abenomics still start
to achieve the much needed traction which it set out to achieve when implemented. We
don’t feel like there is a second chance or the prospect of Japan turning back from this.
As China slows, Japan will become a larger focus point in 2015. The quarterly economic
data will start to reflect the true nature of the economy once the sales tax distortions are
removed and Abe will have a clear mandate.

20. 2020
What happens in the long term to Japan’s debt levels remains to be seen. The irony of
the BOJ is that a 2% inflation target might stimulate the economy but it will also increase
the servicing cost of debt which needs to be addressed with tighter fiscal measures,
themselves a risk to the economic recovery. We’ll discuss our exact outlook for the
Nikkei 225 and the Yen in our 2015 outlook guide to be published at the end of January.
Expect much more on this topic.

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5 Major Themes for 2015: Join the webinar to discuss these points
Invast Insights chief editor and contributing author Peter Esho will summarise his
outlook on 5 key investment themes he believes are critical in 2015. Esho will document
his findings based on the performance of key markets in 2014 and where he believes the
big opportunities lie next year. His presentation will focus on the following 5 themes:
 Watch closely what happens to Apple shares.
 Watch closely what happens to European shares.
 Watch closely what happens to Japan’s Nikkei.
 Key energy losers & impact on their lenders.

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Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your
Money Your Call’. His webinar will cover both the fundamental and
technical outlook on these key themes and a basic introduction to
Invast’s new DMA CFD product offering which complements MT4
and other services.
This webinar is expected to fill fast. Q&A will be open straight after the presentation.
Register now by visiting http://www.invast.com.au/resources/webinars.aspx.

23. 2323
Go to www.invast.com.au/insights to get a
complimentary 4 week trial and receive the latest
insights as they are published to our live clients.

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Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

25. 2525
Risk Warning: It's important for you to read and consider the relevant Product Disclosure
Statement, and any other relevant Invast Financial Services Pty Ltd documents before you
decide whether or not to acquire any financial products listed in this email. Our Financial
Services Guide contains details of our fees and charges. All these documents are available here
on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are
leveraged products and carry a high level of risk and you can lose more than your initial deposit
so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take account of your
objectives, financial situation or needs. Before acting on this general advice you should
therefore consider the appropriateness of the advice having regard to your situation. We
recommend you obtain financial, legal and taxation advice before making any financial
investment decision.

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