Another Reason to Buy Japan

Japanese stocks have been hot with the birth of Abe-nomics. And in a reinforcing feedback loop they may be ready to make their own Great Leap Forward. The chart for the Japan iShares, $EWJ, has been building a bearish Butterfly Harmonic and just breaking the B level higher. The Potential Reversal Zone (PRZ) at 12.90 is still a good long way above. And from a more traditional Technical Analysis perspective price is juts about to break resistance from May to the upside.

ewj

These are both positives for the Japanese market in their own right. But a little thing known as the carry trade is about to kick in and give the market yet another boost. The chart of the Australian Dollar against the Yen shows the important role it has played for the Japanese market to date. In the carry trade, traders shorting the Yen because it is cheap to borrow and then invest in the Australian Dollar because it has a high interest rate. This leads to a cheapening of the Yen both against the Australian Dollar and absolutely. It is the latter that interests us here. Weakening the Yen is a positive for Japanese

aud-yen

stocks. Take another look at that chart of the Japan iShares since July 2012 and notice the correlation between that market and the currency pair. The chart below shows that the pair played out a bearish Deep Crab Harmonic and retraced 50% of the move, but is now heading back higher. The Australian Dollar is strengthening and the Yen weakening. Buy Japan.

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