Whatâs Going On Here?The Bank of Japan (BoJ) stunned markets on Tuesday after switching up its deep-rooted deflation-fighting policies. What Does This Mean?âInflationâ could be most of the globeâs word of the year, but Japanâs been focusing on the exact opposite for decades now: deflation â yup, falling prices. That might sound like the dream these days, but â believe it or not â itâs actually a bigger problem than inflation. Itâs such a problem that Japan brought in an interest rate control policy back in 2016, allowing the countryâs government to load up on cheap debt and keep spending to stimulate the economy. The BoJ seemed to stick to those guns just last week, saying it would be premature to shake up those policies without evidence of inflation-fueling wage growth. So it was pretty shocking when the bank announced that itâs now lifting its interest rate cap, signaling that it could be more concerned about inflation than deflation. No wonder stunned financial markets sent the Japanese yen skyrocketing against the US dollar after the news. Why Should I Care?For markets: Americaâs watching.
The âcarry tradeâ is a common tactic that involves borrowing in Japan at cheap rates, changing that borrowed yen into dollars, investing the dollars into US government bonds with higher rates, and pocketing the difference. That makes traders a quick buck, but it hurts the yen against the US dollar. Now the yenâs on the rise, though, carry traders might throw their strategy into reverse â giving Japanâs currency another leg up. Now, that could really tempt any US investors with wandering eyesâŠ
Zooming out: We canât afford this.
Japanâs built up a Mount Fuji-sized pile of debt over the years, and with IOUs totalling nearly 250% of the economy, itâs the most indebted country in the world (tweet this). So letâs be real, the BoJâs unlikely to start jacking up rates at the same pace of its American central bank counterpart anytime soon. | 