Birchtree
Well-known member
From TWSJ dated 7/3 by Scott Patterson
"The Japanese yen recently hit a four-year low against the dollar and a record low against the euro. That might make sense if Japan's economy were sputtering - but it isn't anymore. If yen corrects, watch out, carry traders.
The tankan survey of business confidence in Japan came in at near a three-year high. Japan's economy expanded at 3.3% annual rate in the first quarter, compared with 0.7% growth in the U.S. Meanwhile, there are even signs that long-dormant consumer spending is picking up. Short term currency movements don't always make sense. In this case, one factor behind the conundrum is a familiar one: the carry trade. The Bank of Japan last raised its target interest rate, by 0.25%, in February to the still bargain-bsasement level of 0.5%. It now seems reluctant to tighten further, at least until after parliamentary elections late this month.
There are good reasons why Japan's central bankers have been slow to move. Inflation there is nonexistent, and wage growth is soft, so they don't need to be aggressive about stamping out price increases. Meanwhile, exports, driven by the weak currency, are still the country's primary growth engine. After more than a decade of dormant economic growth, Japan's central bankers are reluctant to squash their recovery.
Until the central bank gives a clear signal that it plans to increase rates, the yen could remain on its heels. But when that signal does come, the carry trade could quickly unravel.
"The Japanese yen recently hit a four-year low against the dollar and a record low against the euro. That might make sense if Japan's economy were sputtering - but it isn't anymore. If yen corrects, watch out, carry traders.
The tankan survey of business confidence in Japan came in at near a three-year high. Japan's economy expanded at 3.3% annual rate in the first quarter, compared with 0.7% growth in the U.S. Meanwhile, there are even signs that long-dormant consumer spending is picking up. Short term currency movements don't always make sense. In this case, one factor behind the conundrum is a familiar one: the carry trade. The Bank of Japan last raised its target interest rate, by 0.25%, in February to the still bargain-bsasement level of 0.5%. It now seems reluctant to tighten further, at least until after parliamentary elections late this month.
There are good reasons why Japan's central bankers have been slow to move. Inflation there is nonexistent, and wage growth is soft, so they don't need to be aggressive about stamping out price increases. Meanwhile, exports, driven by the weak currency, are still the country's primary growth engine. After more than a decade of dormant economic growth, Japan's central bankers are reluctant to squash their recovery.
Until the central bank gives a clear signal that it plans to increase rates, the yen could remain on its heels. But when that signal does come, the carry trade could quickly unravel.
