Tighten your belts it's the end of the carry trade ........... Cheap easy money from Japan has helped to power the global economy. That era of easy money is now ending so is a credit crunch with it's associated consequences on the way ? :
Japan Central Bank Ends Easy Money Policy Tuesday April 11, 4:42 am ET By Hans Greimel, Associated Press Writer Japan's Gain Could Be World's Loss As Central Bank Ends Easy Money Policy
TOKYO (AP) -- Imagine a bank that doles out loans but charges no interest. For five years, that's what Japan has been for the world economy -- an all-purpose lender with next-to-nothing borrowing costs thanks to the central bank's zero interest rate policy. ADVERTISEMENT
The trend helped pump up economies, stocks and foreign currencies from America to Australia. But concerns are mounting it could all unravel on a global scale with the Bank of Japan's decision last month to finally tighten the taps on all the easy money.
At risk is a flow of funds known as the carry trade, an investment strategy that has lured people to Japan to borrow money on the cheap and invest it overseas for higher returns.
No one is sure how much money is at stake, but economists say stopping the flow could prompt global investors to sell their holdings of stocks, bonds and other assets outside Japan, particularly in the United States.
That could weaken the dollar, push up yields on U.S. Treasury bonds and boost interest rates in the United States and Europe.
"When it starts to reverse, it could lead to some real shock waves in the market," warned Kenneth S. Courtis, the Asia vice chairman of Goldman Sachs Ltd. in Tokyo.
The carry trade is driven by the gap between near-zero percent interest rates in Japan and higher rates elsewhere in the world.
In an attempt to bail the world's second-largest economy out of more than a decade of doldrums, the BOJ implemented a super loose monetary policy five years ago to make it easy for companies to borrow funds.
Not only did the central hold interest rates close to zero percent, it flooded commercial banks with about 35 trillion yen ($295 billion) in daily liquidity, nearly six times the amount banks actually needed, by many economists' estimates.
It didn't take long for global investors to start exploiting all this cash sloshing around at close to zero percent.
They borrowed money from Japanese banks and invested it overseas for higher returns. In the 12-nation euro zone, the key interest rate is
2.5 percent, while the U.S. benchmark rates are now 4.75 percent.Other popular destinations have been New Zealand, where the key interest rate is 7.25 percent, and Iceland, where the central bank recently hiked rates to 11.5 percent.
On March 9, however, the BOJ declared Japan's economy is back on track and soon ready for higher interest rates -- a trend that will squeeze the profit margin, or spread, on carry trades, making them riskier and less attractive.
It's hard to know to what degree -- and where -- investors will move their money, but many experts believe that U.S. markets could suffer as a result.
"What everyone is worried about is the whole regime will disappear," said David Bloom, a currency analyst at HSBC in London. "At some point this whole carry trade situation will end. The point is whether this is the catalyst."
"That's why it's such an important and seminal moment for financial markets," he said.
Calculating the amount of money involved in the yen carry trade is difficult because it requires tracking all yen deposits used for carry trades and converting them into various foreign currencies, but it could easily be billions. The Bank of International Settlements estimates turnover in the foreign exchange market at $1.9 trillion a day in 2004, and yen transactions account for a portion of the total.
In a sign that investors are already reacting to the shift, the yield on Japan's 10-year government bond has climbed to around 1.9 percent from 1.6 percent since the BOJ's announcement last month.
The dollar has so far held steady in a range of 115 yen to 120 yen, but it could drop as low as 105 yen by year's end as the BOJ gradually siphons off extra liquidity, according to Marc Ostwald, a strategist at Monument Securities in London.
On a broader scale, Japan's decision to tighten monetary policy completes a rare picture of rising rates in the world's biggest economies, with the European Central Bank and the U.S. Federal Reserve lifting global borrowing costs from their lowest levels since the
1970s..........