General strategy and methodology:

It is our opinion that the current debt levels and requirements of the Japanese government cannot be sustained in the long term. We also hold the opinion that austerity plans will collapse in Japan due to the country’s current reliance on debt to finance its economic growth. The Japanese Ministry of Finance will be required to issue more debt in order to fund a growing variety of governmental budget requirements. Accordingly, we believe that both five and ten year Japanese bond yields will rise and bond prices will fall considerably. In an attempt to capitalize on our beliefs we intend to hold long-term short positions against Japanese government debt instruments. We will sell and buy options as part of a ratio spread on a mixed variety of Japanese futures and options contracts to build a net short position against Japan’s debt. This position will be held for a prolonged period of time in anticipation of our forecast coming to fruition.

Key market factors:

• Japan has a debt to GDP ratio of over 230%
• Japan’s interest expense on its debt is approximately 60% of total tax receipts
• A small increase in borrowing costs pushes the Japanese government to a situation where interest expense exceeds total tax revenue
• Japanese interest rates are near historic lows
• Approximately 95% of Japan’s debt issuances are held by its own citizens
• Japan’s population ranks first of all industrialized nations in the following areas:
• Longest life expectancy
• Lowest birth rate
• Highest average age
• Over time a greater percentage of the Japanese people will rely on the country’s various social programs (social security) which will keep government expenses trending upwards
• The Japanese debt market will be strained as fewer Japanese citizens will remain in the workforce
• Fewer citizens in the work force may reduce the ability of the Japanese government to raise revenue through taxation of wages
• With fewer citizens in the workforce, Japan may have to look to the rest of the world to finance its debt
• We believe that the global markets will likely require higher rates of interest in exchange for investment in Japanese debt

   

  Catalysts for a potential Japanese sovereign debt crisis:

   European sovereign debt crisis
   Rate hikes in the developed markets
   Inflation and a reduction of current account surplus from foreign energy purchases
   Further cuts in sovereign debt ratings driving it below investment grade
   Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world with approximately $1.4 Trillion USD, is now a net seller of funds as contributions decrease as population ages: it sold bonds worth around 720 Billion Yen in fiscal 2009 to cover its expenses
   Japan Postal Bank has issued notes that will start diversification of its investments. They currently hold the largest deposit base of Japan, approximately $2 Trillion USD and 80% of its assets are in JGBs
   Significant devaluing of the Yen by the BOJ puts pressure on holders of JGBs. Owners will be less likely to hold a Yen-denominated asset in a devaluing situation

  Risk Disclaimer:

  The risk of trading commodity futures and options is substantial. the high degree of leverage associated with commodity futures and options can work against you as well as for you. This high degree of leverage can result in substantial losses, as well as gains. you should carefully consider whether commodity futures and options are suitable for you in light of your financial condition. If you are unsure you should seek professional advice. Past performance does not guarantee future success. in some cases managed accounts are charged substantial commissions and advisory fees. those accounts subject to these charges may need to make substantial trading profits just to avoid depletion of their assets. Each commodity trading advisor ("cta") is required by the commodity futures trading commission ("cftc") to issue to prospective clients a risk disclosure document outlining these fees, conflicts of interest and other associated risks. The full risk of commodity futures and options trading cannot be addressed in this risk disclosure statement. no consideration to invest should be made without thoroughly reading the disclosure document of each of the ctas in which you may have an interest. requesting a disclosure document places you under no obligation and each document is provided at no cost. the cftc has not passed upon the merits of participating in any of the following programs nor on the adequacy or accuracy of the disclosure documents. other disclosure statements are required to be provided to you before an account may be opened for you.

  Past performance is not necessarily indicative of future results. additionally, in making an investment decision, prospective clients must also rely on their own examination of the person or entity making the trading decisions and the terms of the advisory agreement including the merits and risks involved.

  Please see full disclosure document for all risks associated with this trading strategy.