A day doesn’t seem to go by without a market pundit asserting that Japan is in a monetary and fiscal death spiral. It’s easy to come to such a conclusion given:Debt to GDP: 230%.Bank of Japan (BOJ): Holds over 50% Japanese Treasury debt.Population: Shrinking by 0.5% a year.GDP Stagnation: Real GDP has grown by less than 0.5% annualized since 2008.Debt Servicing: Nearly 25% of Japan’s fiscal budget is spent on servicing its debt.Yen: Its currency has fallen by over 50% against the US dollar since 2012, as shown below.Based on those stats and others, it’s easy to see why many think it’s only a matter of time before Japan’s economic system collapses. Michael Nicoletos, in Japan Isn’t Losing Control, argues otherwise.In fact, he thinks everything is going according to plan. To wit, he deems the BOJ as “the most experienced unconventional monetary operator on the planet.” With the Bank of Japan owning about half of all Japanese government bonds and domestic holders a large majority of the remaining debt, Japan effectively is its own bond market. This allows the BOJ to let long‑term yields rise and engineer a weaker yen, which boosts exporters’ profits. To wit:When Toyota’s finance team crunches the numbers, they estimate they gain about $300 million in profit for every single yen the currency weakens against the dollar.Michael believes Japan and China are in a “diplomatic crisis.” Given that their second-largest trade customer is China, Japan needs to diversify. A weaker yen allows such to occur. He states:Japanese goods are becoming cheaper relative to Chinese alternatives, not just for American buyers, but also for customers throughout Southeast Asia, Europe, and Latin America. Just as political tensions make relying on China riskier, Japan becomes a more attractive alternative supplier.Overall, Michael claims that “the yen is not crashing because Japan lost control” but because “Japan wants it to.” Furthermore, this is a major but “underappreciated” story in global finance.Breadth Is Good, But ConfusingAs we share below, all but one of the stock factors is overbought on an absolute basis. The one oversold factor is low-beta stocks. Interestingly, the high dividend yield factor is among the most overbought sectors. Generally, over the last six months, low-beta, high-dividend, small-cap, and value-oriented sectors have had similar scores and, for the most part, been among the worst performers.The current divergence is unique for this cycle. Similarly, note the divergence between emerging and developed markets. And for that matter, the separation between small-cap value and small caps.Sector analysis shows that interest rate-sensitive sectors, especially utilities, are oversold relative to the market. It’s worth noting that natural gas prices are up by more than 50% since mid-October. Given that many utilities’ customer pricing is regulated, the higher prices of its primary input are weighing on margins.Tweet of the DayOriginal Post