Japan - the world’s third-largest economy - is on the brink of its first recession in six years.

According to a report in The Daily Telegraph today, Japan’s gross domestic product contracted at an annual rate of 2.4% in quarter that ended June 30, after expanding 3.2% in the first quarter.

The news sent Japan’s Nikkei 225 down the most in a month.

Taipan Publishing Group’s Adam Lass says it’s a good time to short iShares’ Japanese ETF, EWJ…

Five years ago, the legendary Japanese exporting machine dragged the country out of its recession by flooding the U.S. (among other markets) with relatively cheap, reasonably high-quality products.

Unfortunately, U.S. consumers are in a bit of a funk right about now, so Japanese exporting is down 2.3%, leaving such mighty manufacturers as Toyota (TM:NYSE) with rapidly diminishing profits. And speaking of consumers, internal consumer spending represents better than 50% of Japan’s economic action. Unfortunately, spending fell 0.5% in the second quarter.

How are they taking all this in the land of the rising sun? If Dai-Ichi Life Research Institutes’ Hideo Kumano is representative, “The numbers are awful. Things are going to be very tough in the second half of the year.”

Since time immemorial, the usual response to a slowdown like this would be to crack open the central piggy bank and pump a little specie into the system, just to grease the wheels of commerce a bit. Unfortunately (as I have pointed out ad nauseum) this whole international crisis stems from the rabid overuse of national printing presses.

In this particular case, the Bank of Japan has not raised its target rate above 0.5% since 1995. This has created an incredible thirst for borrowed yen on the part of arbitrageurs, who would cart them off to places like the U.S. and EU where they could buy bonds with interest rates of an order of magnitude higher.

Now, however, this obscenely low rate has left the BOJ with no wiggle room whatsoever, now that it actually needs to inject some additional liquidity. As the fine details of the horror sink in the great herd mind, Japanese shares have burned off some 29%.

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And quite frankly, that only represents about half of what’s coming. An examination of the Nikkei 225’s chart reveals a Japanese market mired in both long-term, mid-term and short-term down cycles.

Overall this blue-chip index has been losing value since 1989. Drawing in a little closer, and one can see a double-top formation with an early high at 20,833 in April of 2000 and a lower high at 18,295 come July 2007.

Both of these highs were quickly followed by Comparative Average Sell Signals, with the seven-month average cutting under the 13-month average. The first instance was followed by a 41-month bear market. I see no reasons to presume that this cycle will be any different.

As I have mentioned repeatedly, bear markets are normal natural parts of the great economic ebb and flow. They are also an excellent opportunity for dramatic gains — if you are willing to stretch your minds a little.

At Taipan’s recent San Francisco conference, I pointed out that iShares’ Japanese ETF, known as the EWJ, mimics the Nikkei reasonably closely, allowing a trader so inclined to play put options against the broad Japanese decline without ever actually leaving the safety of the American marketplace.

Specifically, I recommended EWJ January 12 puts (EWJ ML), which have already gained some 22% in the few short days since the conference. Should the Japanese blue chips fall another 12% (the highest of my three predicated targets!) over the next few weeks, these calls stand to gain another 82%.

Source: Here’s How to Bank on Japan’s Recession