Markets Actually Prefer Japan's Nuclear Wasteland to European Investments

How screwed is Europe? Investors are leaving euro investments and heading for...Japan? Despite a collapsed economy, a gross debt that makes Greece look like amateurs, and a nuclear crisis that is uncontainable in the short term (and possibly spawning a great Godzilla movie in the long term?) investors are flocking from the formerly safe shores of Normandy for the glowing shores around Tokyo. Japan, already facing a debt that is twice their GDP, needs to borrow money to rebuild the parts of the island chain that were hit by earthquake and tsunami, as well as pay to more permanently relocate citizens who were living near the melted-down nuclear reactors. Apparently, bond investors feel Japan is a safer play (despite, you know, nuclear meltdown and natural disasters) While this will help with lowered financing costs for the government as it tries to manage borrowing more on top of its nearly $3 trillion debt, it has some pretty awful effects for the Japanese economy overall. For starters, the yields on Japanese bonds were not very high to begin with. Japan's culture encourages saving and delaying gratification, so the market for Japanese debt has long been able to stay in-house and get away with minimal yields. But with crises across the globe, bond investors are tapping into the Japanese market, driving yields even further down. Second, the extra investment attention in Japan is pushing the yen higher, just as Japan needs a lower yen. Why? They are already heavily dependent on exports, and with domestic demand for non-essential goods on hold (from the disasters), their need to sell overseas is even greater. Yet, the higher yen discourages exportation and may provide some pretty strong headwinds against a Japanese recovery. In an ideal world, Japan could call on its allies for assistance. Alas, these are not ideal times. The United States is busy watching its two political parties behave like children on a playground, deciding over whether or not to pay its bills while playing a $14 trillion game of chicken with 250 years of well-earned credit history. Meanwhile, Europe is busy trying to save itself from a fiscal meltdown and irrelevance. Besides, it would take an immense effort on behalf of its allies to push the needle very far on the dollar yen pairing, so even if possible, it'd be unlikely to occur. ACTION ITEMS:

Bullish:

• The Japanese Yen continues to be a very solid investment, offering capital appreciation and diversification from dollar denominated assets. It also serves as a hedge to stock portfolios, as the Yen is a safe-haven currency and frequently rises on global turmoil. Consider the CurrencyShares Japanese Yen Trust ETF FXY.

Bearish:

• The European sovereign debt crisis is unlikely to end anytime soon. Aggressive traders may want to short banks such as Deutsche Bank DB, Barclays BCS and Banco Santander.

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