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Japan Expert Warns of Risk Factors

Thursday, 30 May 2013 | 6:28 PM ET
Japan Expert Warns of Investment Risk
Thursday, 30 May 2013 | 5:27 PM ET
Stephen Roach, a former executive chairman at Morgan Stanley Asia, says a couple of risks could make Japan too hot to handle.

A couple of risk factors could make Japan too hot to handle, Stephen Roach, a former executive chairman at Morgan Stanley Asia, said Thursday.

At issue was the remedy Japanese Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda were applying to the Japanese economy.

"I worry that Abe and Kuroda are resorting to the bag of tricks that Bernanke and the Fed used, which is using financial engineering to jump-start markets and lead to a weaker currency, and that cuts the edge on the imperative to do the real heavy lifting on fixing this uncompetitive growth structure in Japan," Roach said.

"And I've been worried about that from the start."

(Read More: Look to Japan for Clues: PIMCO's CEO Says)

On CNBC's "Fast Money," Roach, who is a senior fellow at Yale University, noted that the market's response so far has been strong – but added that such a reaction might not continue.

"Investors are coming to believe if there's no follow-through on the reform measures, this program is not going to get traction," he said.

Japanese bonds were a risky bet, Roach added.

(Watch Video: Why Japan Is 'Treading Water')

"When you're going from deflation to inflation, you're changing the inflationary premium, and the days of 30, 40, 50 basis point 10-year JGBs are over," he said. "And that's particularly worrisome for a country like Japan that's got sovereign debt to GDP in excess of 250 percent. How are they going to fund their debt load when they just move up their borrowing costs a fraction from where they are? It's a very difficult situation."

Trader disclosure: On May 30, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTU; Karen Finerman is long AAPL; Karen Finerman is long BAC; Karen Finerman is long C; Karen Finerman is long JPM; Karen Finerman is long GOOG; Karen Finerman is long JCP PUTS; Karen Finerman is long GM; Karen Finerman is short SPY; Karen Finerman is long MDY Puts; Jon Najarian is long AAPL ; Jon Najarian is long JPM; Jon Najarian is long FSLR; Jon Najarian is long TSLA; Jon Najarian is long EMC; Jon Najarian is long JOY; Jon Najarian is long ALTR; Jon Najarian is long COP; Jon Najarian is long GRPN; Jon Najarian is long HL; Jon Najarian is long OC; Jon Najarian is long TMO; Brian Kelly is long TLT; Brian Kelly is long YEN; Brian Kelly is short S&P Futures; Brian Kelly is short NIKKEI.

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