"The people who are getting the carry trade spread are being subsidized by Japanese consumers," Greenspan added.
In a sense.. yes. But those people who participate in that very carry trade subsidize the Japanese economy and prevent it from falling into recession/depression (for the time being). How many Japanese jobs (the depositors) would be lost should the Yen rise to levels where it's products were no longer cost competive? So Japan needs those savers as a source of inexpensive capital to restore their fragile economy, but too much of a good thing has its consequences. And that is where the carry-trade comes into for the purpose of siphoning off excess deposits and lending them to other foreign investors who use the funds for higher rates of return.
Because without the carry trade, interest rates would fall completely to zero, the Yen would go through the roof in value, and Japan's monetary base would drastically shrink as all of those loans were paid off, leaving nothing to pay the depositor. And the economic contraction created by FORCING those carry trades to unwind over a short period of time might creat a global economic depression from the contagion effect.
Japan has some major issues to face economically. They have one of the highest national debts versus GDP of any nation, primarily due to their incremental economic "pump priming", as opposed to economic shock treatment that fosters consumer demand. And even that economic shock treatment might not work considering that 1/4 of Japan's population is entering retirement (and are consequently the greatest depositors).
I can't say that I know the answer for Japan's economic problems, or how to spur internal economic demand, but forcing a "short squeeze" in the Yen carry trade is certainly going to evoke a major response by the Japanese CB and government to flood liquidity into the market place, if only to preserve their economic recovery. But this infusion of liquidity will mean nothing unless it spurs internal consumer demand to the point where they spend, rather than put their money into the financial equivalent of a "mattress".
It certainly will require the Japanese government to do more than create "make work" projects via it's deficit spending. This time the Japanese people will have to be convinced to fund internal economic projects that will provide them a higher yielding rate of return than near 0% deposits.
So.. Greenspan is correct about Japanese consumers subsidizing the carry trade. But it works the other way around. Maybe one of the things that might assist Japan is to motivate Japanese savers to invest for THEMSELVES in other high-yielding foreign financial instruments (rather than the Bank of Japan, or Postal Savings Bank acting as the middle man). Invest in foreign debt directly, rather than domestic savings accounts. It's long overdue, but there is a definite cultural risk aversion to investing in anything other than Japanese debt and stocks. But something has to "sop up" those excess deposits in Japanese banks.
So it's a subsidization of the carry-trade that is entirely driven by the risk-averse nature of Japanese savers/investors.
And it's apparently quite voluntary on the part of the Japanese consumer/saver.
Hawk |
