Could the Big Yen Short Turn on a Dime?

NEW YORK (TheStreet) -- If you have paid any attention to the financial markets at any time in the last three months, you would know about the George Soros' big yen short.

The legendary investor sold his SPDR Gold Shares ( GLD) holdings fast and furiously to partly finance his short yen position and made a cool $1.2 billion in profit (unrealized as of his December regulatory filing). The whole world has joined in.

But now the yen is poised to get a lot more cheaper, but for the opposite reason upon which the big yen short is premised. Allow me to explain.

The thinking goes that the theatrically aggressive devaluation of the Japanese currency, as affirmed by Federal Reserve Chairman Ben Bernanke and the G20 summit, would provide a long-needed boost to Japanese exports, right the sins of past timid actions by the Bank of Japan and make everything better.

The media have given more than enough coverage to the "lost decades" of Japan, which I argued in 2010 at Seeking Alpha should be considered a success story for the Bank of Japan considering the country's demographic trends.

But unless you follow the Japanese economy, you might not know that Japan has consistently run a trade deficit since early 2011 (see the chart below, generated at TradingEconomics.com).

The market's thinking is displayed by the dramatic rise in the Nikkei stock index, which has occurred in lockstep with the decline of the yen. Cheaper currency equals more exports, which equal a higher stock market. This is so simple an idiot would know it.

I have never bought into this currency war business, at least not in such simple terms. I mean, if economics were so simple, any idiot could be the head of a central bank. OK, that's already happened -- never mind.

Japan needs to import practically all resources, and would need to import even agricultural products if not for the stellar protectionist policies. Chinese manufacturing involves a large portion of value-added remanufacturing, importing components (along with raw materials) and exporting assembled products.

Sensitivity to exchange rates in these economies, I suspect, is much smaller than the common misconception. Furthermore, the sad fact is that Japanese economy has long lost its core competency. The nation completely missed the boat on the Internet revolution of the 90's and then on the mobile revolution. It also failed to hold ground in other industries -- even on TVs when flat-screens swept the world.

I don't have enough space here to offer an in-depth analysis of Japan's decline. Suffice it to say that such a prolonged, wide-ranging decline cannot be attributed primarily to a currency exchange rate. Nor can it be fixed with an exchange rate.

So here comes the kicker. The Japanese Ministry of Finance says the trade deficit for the first 20 days of January (provisional) is almost 1.2 trillion yen.

To put this in context, the record deficit was 1.56 trillion yen, set in January, 2012. The deficit was 640 billion yen last December.

And the latest number comes at least three months after the yen began its huge 20% decline, in late September.

Granted, an exchange rate takes time to work its way through the economy. But the latest number (for only 20 days) is almost double the entire month of December. November and December at least had the excuse of the mass boycott in China. What's your excuse, January?

Massive monetary easing and inflation in a trade-deficit economy laden with massive debt is a dangerous gamble. (The U.S. is an exception as long as the dollar remains the only real choice as the reserve currency). If the expected boost to the economy doesn't materialize soon, the devaluation based on optimism could quickly turn into further devaluation in the name of panic collapse. Look at Thailand in 1997.

Could Mr. Soros, who famously defeated the sovereigns of Great Britain and then Thailand, have been angling for a similar feat with Japan? It's a most intriguing possibility. If so, and if he succeeds, the $1.2 billion paper gain he has is only the tip of the iceberg.

I dare not predict the timing of this turn of events. But Japan Inc. needs to show some good trade numbers soon. Keep this in mind, and check iShares MSCI Japan ( EWJ) and CurrencyShares Japan Yen Shares ( FXY) once in a while, as you keep busy following the headlines. If/when it happens, it could easily be the biggest event since the 2008 crisis. And then everybody would say, "But of course, this makes perfect sense!"

At the time of publication the author had no positions in stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage..

More from Opinion

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense