How to Profit from the Misguided Bank of Japan Stimulus Efforts

 bank of japan stimulusThe accelerated Bank of Japan stimulus announced Friday took the media by surprise.

But for Money Morning Chief Investment Strategist Keith Fitz-Gerald, Japan's "surprise" stimulus is hardly that.

Fitz-Gerald told investors in March 2013 that Japan's new round of "easy  money" would fail to do anything different than the previous actions.

BOJ's announcement comes a little more than a year and a half after Japan first implemented so-called "Abenomics," named after Prime Minister Shinzo Abe.

Abenomics aimed to reverse Japan's deflation problems, stir up demand, and get the country back on a path to growth. Japan's 20-year battle with deflation has contributed to the country's debt-to-GDP ratio of close to 250% - the highest in the world.

Abenomics consists of three "arrows": quantitative easing (QE), fiscal stimulus, and structural reforms.

The first two are already aggressive measures to try and spark inflation. That's why many were surprised at the announcement Friday by the BOJ to ramp up these efforts.

The first arrow, QE, looked to increase the monetary base by 60 trillion to 70 trillion yen per year ($526.6 billion to $614.4 billion). The program also included an annual purchase of long-term Japanese government bonds to the tune of 50 trillion yen ($438.9 billion) per year to put downward pressure on interest rates.

The second arrow addressed fiscal policy, and amounted to 10.3 trillion yen ($90.4 trillion), or 1.4% of Japanese GDP, in debt-financed stimulus spending.

The new plan would triple the pace of its asset purchases, extend maturities on bond purchases, and raise the ceiling of annual government bond-buying.

But here's why Fitz-Gerald wasn't surprised...

The Abenomics plan has been open-ended from the beginning. There was never an explicit timeline or price-tag. It was only initiated to address Japan's numerous economic woes.

Another clue that the BOJ would increase stimulus came from Abe's nominee for the head of the Bank of Japan in March 2013, Haruhiko Kuroda. The central bank leader pledged to pursue a "whatever it takes" mentality to fight deflation last year.

Japan's Struggling GDP: By the Numbers
Japan's annualized GDP growth rate seemed to be rebounding with Prime Minister Shinzo Abe's election at the end of 2012. In the first quarter of 2013, the annualized GDP growth rate was at 5.1%. But then it spiraled downward, shrinking by 0.1% in the fourth quarter.Then there was another surge in optimism at the start of this year. Growth grew 6%.But that number was vastly overstated.

The 6% growth came as demand picked up artificially. Japan announced a hike in the sales tax to come in the second quarter of the year, and that compelled Japanese consumers to up their demand ahead of the implementation of the tax.

The next quarter, with implementation, annualized GDP growth plunged 7.1%.

And "whatever it takes" is what Japan needs.

You see, there's a big reason Abenomics has not worked. Japan isn't dealing with a standard economic crisis that academics and economic theory can fix.

This isn't a financial crisis. It's a demographic one.

Japan: A Crisis of Fertility, Not Finance

Japan's aging population is hampering growth through a labor shortage and holding down consumption.

Fitz-Gerald said that's why Japan "doesn't need more debt - but it does need a kick in the butt."

"There is very little domestic consumption to speak of," Fitz-Gerald said. "Wages are rising slower than the cost of living which is compounding matters."

"At the same time, unbelievably, politicians who didn't get the hint from the biggest drop in domestic spending in years following the national sales tax hike are talking about another hike."

Japan's total fertility rate ranks 208th of 224 countries - a rate of 1.4 births per woman - according to data from the Central Intelligence Agency. As many critics of Abenomics have said, you can't print a new generation.

It's unfortunate that Japan's woes are receiving the wrong policy prescription - but it only presents a profit opportunity for us...

How to Profit from the Yen's Downfall

There are three ways to play the Bank of Japan stimulus efforts.

1. Buy Stocks

Money Morning Capital Wave Strategist Shah Gilani said the BOJ's stimulus will be well received by the broader markets.

That means if you're not in the market right now, it's time to be. The BOJ-induced buying frenzy helped move the Dow Jones Industrial Average 195 points Friday.

"Central bank stimulus is sweet music to stocks," Gilani said. "If you want to make money on this news, you buy, buy, and buy stocks and more stocks."

Here's a list of recent stock picks from Money Morning's investing experts.

2. Trade Currency Pairs

A more sophisticated trade involves diving into the currency markets.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

"You could play equities but the yen has always and will always be the better play. You just have to be more patient," Fitz-Gerald said.

Fitz-Gerald said he sees the USD/JPY value soaring from a just above 110 to 200 within the next three years. Getting in now on the currency trade now could deliver gains of up to 80% in the long term.

3. Buy This Currency ETF

If you're not looking to trade currencies and would rather stick to traditional markets, you can get exposure to the yen's devaluation by buying the ProShares UltraShort Yen ETF (NYSE Arca: YCS), an exchange-traded fund that rises whenever the yen falls against the U.S. dollar.

Fitz-Gerald told readers of our Private Briefing investment service about YCS in February 2012, and it has doubled since then.

More on Central Banks: All indications are that markets will continue to ride the wave of central bank liquidity as far as it takes them... but there's trouble ahead...