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Japan's short term interest rate.
Old 02-21-2007, 03:04 PM   #1
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Japan's short term interest rate.

Maybe this belongs in Other Topics, but it's a money-making question, so bear with me.

Ok... what am I missing? This question is mostly out of ignorance. I've read how Japan's "banking system is hosed up" - pardon my technical jargon.

Quote:
Two months, two surprises. That's how many central bank watchers interpreted the Feb. 21 announcement by the Bank of Japan's policy board that it would raise its benchmark short-term interest rate target. The hike was the first since July when the BOJ lifted rates from 0.25% to 0.5%—their highest level in a decade, and it came in counterpoint to the BOJ's decision last month to hold rates steady.
Unheralded Rate Hike Irks Japan - Businessweek.com

So, their short term rate "Fed funds" type of rate is 0.5% AFTER they raised it (and ticked apparently everyone off, in the process).

Quote:
Japan is still in the midst of its longest expansion since World War II. The economy is on track to grow more than 2% in the fiscal year ending this March, thanks in part to rates that are still the lowest among industrialized nations. (Compare that with the U.S.'s key rate, at 5.25%, and the euro zone's, at 3.5%.)
Does that mean, then, their loan rates are rock bottom? What's stopping someone from loaning money in Japan and parking it in US CDs/MMFs, etc. ?

Pardon my ignorance. I can't wrap my mind around this and figured someone here would have a fantastic explanation.

-CC

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Re: Japan's short term interest rate.
Old 02-21-2007, 03:13 PM   #2
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Re: Japan's short term interest rate.

Quote:
Originally Posted by CCdaCE
Does that mean, then, their loan rates are rock bottom? What's stopping someone from loaning money in Japan and parking it in US CDs/MMFs, etc. ?
People do, but they are exposed to currency exchange risk. Do you know which way the dollar vs yen will go?

Buying stocks in Japan with Japanese yen seems like a pretty safe play, though. Which means their stock market should rise, right?
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Re: Japan's short term interest rate.
Old 02-21-2007, 03:19 PM   #3
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Re: Japan's short term interest rate.

Borrowing money in Japan, for almost no interest, and parking in other countries (bonds, CDs, whatever) is called the "carry trade". It has been lucrative for the last 10 years, but someday a 20% drop in the dollar (or whatever) will wipe out some of the easy money.
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Re: Japan's short term interest rate.
Old 02-21-2007, 04:26 PM   #4
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Re: Japan's short term interest rate.

Like RTR said, Google 'cary trade', its very large and a lot of people are making money out of it in the $Bs. When it shifts the whole arrangement for US-Yen exchange rate will be hammered. We like a strong dollar as it gets us imported things 'cheap' and Japan (& others) like it so they can sell us things. It will end, either slowly or quickly. It should hammer our economy, followed by major problems in most foreign economies.
I am not a big Bear and I suspect things will sort themselves out over time. But one scenario for the start of the 'adjustment' would be the end of the cary trade.
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Re: Japan's short term interest rate.
Old 02-21-2007, 05:14 PM   #5
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Re: Japan's short term interest rate.

Quote:
Originally Posted by CCdaCE
So, their short term rate "Fed funds" type of rate is 0.5% AFTER they raised it (and ticked apparently everyone off, in the process).
When they tried to signal such a move in January, the politicians came down on their heads, so they decided to be a bit more, um, circumspect this time around.

As the holder of a low interest rate mortgage, I am rooting for them to raise even further. Even without such selfish concerns, I think it is necessary if they don't want to completely destroy the yen.
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Re: Japan's short term interest rate.
Old 02-21-2007, 05:18 PM   #6
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Re: Japan's short term interest rate.

Japan can raise internal interest rates with political ease at this time because the dollar-exchange rate is so low.

When they raise interest rates it causes the Yen to rise relative to the dollar and the manufactures scream that they are killing their exports. However now with the Yen so low rates can go up with relatively little pain.
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Re: Japan's short term interest rate.
Old 02-21-2007, 07:23 PM   #7
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Re: Japan's short term interest rate.

Longest expansion since WWII is relative. The GPD has only growing by less than 2%. The economy is still weak. The last time it looked like the economy was improving, the BOJ raised rates too early. That sent the economy into a tailspin.

One other thing is the BOJ’s independence is not the same as in America. The BOJ could be placed within the ministry of finance so they need to be very careful of the bureaucrats and the politicians.

I heard that 12 years ago the yen was 80 to a dollar. If you factor in 12 years of inflation for the US and deflation for Japan, the yen would have to hit 60 yen to the dollar to be at the same level. It is currently at 120.
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Re: Japan's short term interest rate.
Old 02-21-2007, 08:55 PM   #8
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Re: Japan's short term interest rate.

Ahh, "carry trade".

I was looking for a succinct phrase to sum all this up other than interest rate arbitrage.

Thanks everyone, for your responses, and for those yet to come.

Quote:
Originally Posted by mikew

<snip>
The last time it looked like the economy was improving, the BOJ raised rates too early. That sent the economy into a tailspin.
<snip>
Now where's that silly Japan fund? The one that's been lying in the weeds for decades.

I figured Vanguard Pacific Stock Index Fund Investor Shares (VPACX) would do better than it did in the last 12 mos. (7.8%) since I had read that Japan was trying to clean up its banking system, write off debt, etc., but apparently not. The last five years were pretty dandy though (17+ %). I'm always late to the party.

-CC
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Re: Japan's short term interest rate.
Old 02-21-2007, 09:21 PM   #9
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Re: Japan's short term interest rate.

I remember a couple of years ago when the interest rate went negative, as part of the liquidity trap the economy was in. You had to pay your bank to keep your money with them.
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Re: Japan's short term interest rate.
Old 02-21-2007, 10:25 PM   #10
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Re: Japan's short term interest rate.

Japan has had the monetary pedal to the metal for over 10 years now.



It looks like asset prices finally started to pick up in the last few years, and GDP is now picking up nicely.

Any guesses about how this will play out? Is there any historic precedent for this much liquidity pumping for this long? Where is all this rocket fuel going?
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Re: Japan's short term interest rate.
Old 02-21-2007, 11:35 PM   #11
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Re: Japan's short term interest rate.

No guesses from me...


If I'm reading this chart right, based on PPP, the Yen was overvalued by 23% compared to the US$, in December.

The Yen has fallen since December, but not by anywhere near 23%:



Not making any predictions here, just an observation that some might find surprising.
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Re: Japan's short term interest rate.
Old 02-21-2007, 11:54 PM   #12
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Re: Japan's short term interest rate.

Quote:
Originally Posted by lazyday
If I'm reading this chart right, based on PPP, the Yen was overvalued by 23% compared to the US$, in December.
I'm not sure about over/undervalued. Doesn't PPP just mean that the dollar is weak vs just about every other currency in the world?
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Re: Japan's short term interest rate.
Old 02-22-2007, 01:07 AM   #13
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Re: Japan's short term interest rate.

My reading of the chart shows the Yen to be stronger than currencies in USA, Canada, and Australia. And about the same or stronger than the Euro.

The data may not be optimized for comparing valuations of currency though. I don't think the same basket of goods is used in each country.

Here's another chart; I don't know if the data is better or worse, or if the chart is even still being updated for PPP (instead of just for exchange rates): http://fx.sauder.ubc.ca/PPP.html (near bottom of page)

I think PPP comparisons usually make developed nations' currencies seem overvalued compared to developing nations'.
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Re: Japan's short term interest rate.
Old 02-22-2007, 07:40 PM   #14
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Re: Japan's short term interest rate.

This article talks about many of the points above.

http://www.morganstanley.com/views/g...tml#anchor4447


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