The movement so far isn't definitive. The real question is, where will the yen be in 2013 and longer term? Most analysts that I have read think it will be much weaker due to the huge debt that Japan has and their demographic situation. Sandisk investors (as well Japanese companies) hope that it will go back at least to the 90s, and plausibly back to over 100.
Here is a recent article that describes the situation. Excerpt:
"The fiscal situation of the Japanese government is absurdly unsustainable," said Richard Howard, global strategist for Hayman Capital Management, a Dallas hedge fund known for bets on global economic trends. "Before, we thought this was a problem that could take a few years [to unfold]. But now we think it will be more like a year, a year and a half." Mr. Howard said he is investing in ways that bet on a weakening yen as a result of rises in Japanese bond yields. "We'd expect the dollar to hit 90 to 100 yen, or even 115 yen," within the next 12 to 18 months, he said. Mr. Howard declined to discuss details of his investments.
Sandisk is one way to play that move, although obviously it introduces other possible risks. As well as other possible benefits.
January 30, 2012
Concerns Are Rising on Japan's Debt Default-Insurance Costs Climb as Raters Weigh Downgrades; 'Absurdly Unsustainable'
By YUKA HAYASHI
TOKYO—Jitters from Europe's sovereign-debt crisis are now touching Japan, a country with a long-calm bond market despite fiscal deficits far larger than those of Greece or Italy.
In recent weeks, the cost of insuring against default on Japanese government bonds—a measure of perceived credit risk—has increased sharply, nearing the historic peak at the height of the Greek debt crisis in October. The price for default insurance, through derivatives known as credit-default swaps, exceeds levels seen last March, immediately after natural disasters and a nuclear crisis darkened Japan's outlook.
Investors will be watching two things closely in coming weeks: the credit-ratings firms and the Japanese parliament. Two top raters—Standard & Poor's and Fitch Ratings—have put Japan's government debt on watch for possible downgrade, with verdicts possible over the next month. A key factor in their assessment, and the market's, will be whether Prime Minister Yoshihiko Noda can push a sales-tax increase through the legislature by March. He is battling criticism from opposition parties, and even qualms in his own ruling party.
In order to win support, Mr. Noda and aides are sounding increasingly alarmist. "Hot money that is now targeting Europe will soon be attacking Japan. It's right around the corner," Hirohisa Fujii, former finance minister and the ruling party's tax-policy chief, said in a recent interview. "Our situation is far worse than in Southern Europe or in the U.S."
To be sure, the market's bets against Japan are still relatively small, and most Japanese-government-bond investors stand firmly behind their investments. The price for insuring $10 million of Japanese sovereign debt for five years was $155,000 at a recent peak in mid-January, according to Markit, a data provider. That is well below the $222,000 premium investors paid for France and $530,000 for Italy at that time. Still, the current level represents a jump from $110,000 two months ago, and just $90,000 in July. The total net amount insured through credit-default swaps is $9 billion, according to the Depository Trust & Clearing Corp. While the amount is small, it is more than 40% larger than the figure a year ago.The trend appears to be the beginning of a new phase of skepticism and scrutiny of Japan, whose outstanding sovereign debt is estimated by the government to have reached 1.085 quadrillion yen (roughly $14 trillion) in 2011—approximately the same as the outstanding borrowing of the U.S. government, which runs an economy twice as big.
"The fiscal situation of the Japanese government is absurdly unsustainable," said Richard Howard, global strategist for Hayman Capital Management, a Dallas hedge fund known for bets on global economic trends. "Before, we thought this was a problem that could take a few years [to unfold]. But now we think it will be more like a year, a year and a half." Mr. Howard said he is investing in ways that bet on a weakening yen as a result of rises in Japanese bond yields. "We'd expect the dollar to hit 90 to 100 yen, or even 115 yen," within the next 12 to 18 months, he said. Mr. Howard declined to discuss details of his investments.
In addition to CDS contracts, Japan-skeptic investors, primarily Western hedge funds, are buying "swaptions," a type of option that would bring them profit if Japanese yields rise.
By some measures, Japan's fiscal woes are already worse than Europe's. After decades of undisciplined spending, government debts are more than twice the size of the nation's annual economic output. For next fiscal year starting April, Tokyo has announced a record budget of 93.2 trillion yen ($1.2 trillion). Of that amount, tax revenue covers just 45%. The rest will come from borrowing.
"I must say that's a budget for the end of time," says Toshihiro Uomoto, chief credit analyst for Nomura Securities Co.
Massive reconstruction costs after last year's disasters are adding to the debt load. The Organization for Economic Cooperation and Development estimates reconstruction spending will boost gross government debt to 230% of GDP in 2013 from 218% this year. For Italy, the comparable figure for 2012 is projected to be 128%, for Greece 159%, and for the U.S. 107%.
Those numbers, however, haven't scared off most investors. Rather, the troubles in Europe have prompted many to shift their money into Japanese bonds, still seen as a haven, particularly short-term securities, allowing Tokyo to keep borrowing at low rates. The yield on 10-year government bonds is about 1% in Japan, compared with 1.9% in the U.S. and around 6% in Italy.
"If you ask is Japan the next Italy, my answer is no," says Tomoya Masanao, a portfolio manager overseeing Japanese investments for Pimco.
With abundant individual and corporate savings, Japan will be able to finance its debts without relying on fickle foreign investors for five more years or so, Mr. Masanao says. The vast majority of Japan's government debt is held by domestic investors. Because Japan's debts are denominated in yen, its central bank could print yen to pay back its debts if needed, an option unavailable to individual euro-zone nations, he added.
Others worry that time is running out. Japan reported on Wednesday that 2011 saw the country's first trade deficit since 1980. Trade is a major building block of the current account. If that turns into deficit, it would force Japan to rely more on foreigners to finance its national debt. Income balance, another component, may also turn negative soon as Baby Boomers draw down savings to fund retirement.
Prime Minister Noda says he is putting his political career on the line to implement an unpopular plan to gradually double the broad national sales tax to 10%—a first step to stabilizing the deficit. But prospects are mixed at best, given strong opposition in a divided parliament.
And even if he succeeds, many economists question whether his plan is big enough to make a real dent. The government issued a report last week saying that even if it doubles the sales tax by 2015, it likely won't be able to meet its goal of balancing its annual budget by fiscal 2020.
Andrew Coloquhoun, head of sovereign ratings, Asia Pacific, at Fitch, says his firm is closely looking to see whether the government will implement a broad range of policies aimed at stabilizing fiscal conditions. "So far, we haven't seen that come though," he said.
—Kosaku Narioka contributed to this article.
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