"Disorderly global imbalances could be worsened by the increased usage of the `yen carry trade,' where investors take advantage of low Japanese interest rates and borrow in yen to purchase other securities. It could lead to more entrenched exchange rate misalignments that worsen global imbalances."
After much speculation amongst traders and intellectuals alike, the Bank of Japan (BOJ) finally raised the short-term interest rates to 0.5% from 0.25%. This is the second hike in less than a year since the first hike in July 2006 that marked the first change in monetary policy as the BOJ ending five years of zero interest rate regime hiked rates to 0.25%. The nation's apex bank highlighted improvements in two key areas viz., consumer spending and less concern about the strength of important overseas economies. However, it failed to convince market analysts as many believed it was ill-timed as well as not sufficient enough to boost the economy further. On the other hand, there is another section of experts who believe that the rate hike is a ploy to control carry trade. Carry trade, the trend, which has gained notoriety in recent times, is the strategy of buying the currency of a country with low interest rates and investing in currencies of countries with higher interest rates. Market analysts say that capitalizing on Japan's years of zero or low interest rate regime, international currency traders have thronged Japanese markets in hordes and have had huge exposure to the currency; these traders are said to have taken billions of dollars worth of loans and invested in other currencies like Australian dollar and New Zealand's currency. Several newspapers quoted Merrill Lynch strategist Michael Hartnett saying that the recent rate hike was meant to `scare the pants off carry-traders'. And that until Japanese interest rates rise or local equity markets offer more competitive returns, this scenario is unlikely to change. |
