The world will feel interest rate tremors from Japan
PUBLISHED: 15:47 28 July 2006 | UPDATED: 10:45 01 June 2010
THE decision by the Bank of Japan to lift its overnight call rate from zero to 0.25 per cent ended the six-year-long zero interest rate regime. The move has far-reaching implications both for currency relationships as well as the financial flows which hav
THE decision by the Bank of Japan to lift its overnight call rate from zero to 0.25 per cent ended the six-year-long zero interest rate regime.
The move has far-reaching implications both for currency relationships as well as the financial flows which have sustained the $800billion US balance of payments deficit.
It means that for the first time since the 1980s, the Bank of Japan, the US Federal Reserve and the European Central Bank are all tightening interest rates and draining away funds that have been used to finance the property boom of the past period.
Japanese rate tightening has particular significance because funds raised in Tokyo have played a key role in financing so-called carry trades in which funds raised at a cheap rate in one market are used to finance risky trades in others.
Future rises in Japan's interest rates could encourage Japanese investors to invest their money at home rather than abroad.
The danger is that this could lead to a higher yen and a fall in the value of foreign assets as a result of lower demand.
Less investment in US assets could bring a bursting of the US housing bubble and a brake on consumer-led growth, spreading economic pain across the world.
Japanese pension funds, insurers and individuals hold funds abroad of $2,500billion, equivalent to the overseas holdings of the rest of the world.
If they repatriate part of this money to exploit rising returns at home, the world will feel the tremors.
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