Carry trade update>Japan delays rate hike, increasing worries overseas>
Mutual fund manager David Herro, returning to Chicago on Thursday from Japan, says the phrase that best reflects investment prospects there is the title of a 2003 Bill Murray/Scarlett Johansson movie based in Tokyo, "Lost in Translation."
Herro, recently named international fund manager of the year by fund tracker Morningstar, was commenting on the decision taken by the Bank of Japan during his flight to maintain its short-term interest rate target at 0.25 percent, by far the lowest rate among major industrialized countries.
The bank's action was leaked a few days ago, but nonetheless represented another postponement of what analysts have been expecting for more than a year: the start of steady increases in Japanese interest rates as Japan's economy rebounds.
"All the items in the Japanese news media earlier this week were that Prime Minister [Shinzo] Abe was gearing up his political machine to oppose any rate increase, and it looks as if the Bank of Japan caved in," Herro said. "When central banks listen to politicians, not a lot of good can happen."
What the Bank of Japan does with interest rates matters to investors here and abroad. The gap between practically nil rates in Japan and relatively higher rates in other major countries induces speculators to borrow yen cheaply and carry the money into loans or investments elsewhere.
This so-called carry trade has been evident for several years, helping to bolster global demand for stocks and bonds in the U.S., where the similar rate is 5.25 percent.
Much of the optimism, not to say complacency, embedded in the U.S. stock market reflects the global interest rate differential.
But "if we don't pull the punch bowl away at some point, there could be some significant downside risks to the financial markets," said Michael Woolfolk, senior currency strategist at the Bank of New York.
Woolfolk said he was disappointed that remarks by Bank of Japan Governor Toshihiko Fukui after the rate decision indicated the bank might put off its overdue rate hike cycle until the spring.
"We have no schedule in mind," Fukui said. "That stance hasn't changed at all. We will examine economic data each time and will make appropriate judgments."
The longer the bank waits to begin a gradual rate hike process, the more disruptive Japanese rate hikes might become in global markets, said James Bianco of Bianco Research in Chicago.
"What they are doing is creating a moral hazard," he said. "Their warnings to carry traders are going to fall on deaf ears if they can't even raise rates" from 0.25 percent to 0.50 percent.
The Bank of Japan ended a zero interest rate policy in July, moving to 0.25 percent and prompting speculation that the bank had begun a steady campaign to raise rates, akin to the U.S. Federal Reserve's rate-tightening process in 2004-06.
Most U.S. commentators assailed Thursday's decision. "With the vote and comments, this central bank has abdicated not only its independence but also its integrity," wrote Andrew Busch, foreign exchange strategist at BMO Capital Markets in Chicago. |
