By Daily Crux Guest Editor Brandon Herrin:

Japan's Topix index is up 28% in the past three months - its biggest rally since 1953 - making it the most expensive market in the world. But the world's best hedge funds (Bridgewater, Farallon, and Highbridge) are increasing their short positions - betting the index could fall 50% from its hugely inflated valuation...

Japanese valuations dwarf those of companies in the Standard & Poor's 500 Index, which trade at an average 16.1 times earnings, based on 2009 estimates. Stocks in the Topix are also more than twice as expensive as shares in China, Hong Kong, Australia and South Korea, and trade at about three times the valuations for Germany's DAX Index, the U.K.'s FTSE 100 and France's CAC 40, data compiled by Bloomberg show.

Bridgewater, owned by Ray Dalio, is shorting Casio Computer Co., which is three times as expensive as Switzerland's Swatch Group - the world's largest watchmaker. Highbridge more than tripled its short position in Mizuho - Japan's second-largest bank - to 100.5 million shares in May. And Farallon is shorting Sumitomo Realty & Development Co.

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