To: glenn_a who wrote (90650 ) 1/21/2008 1:00:51 PM From: GST Read Replies (1) | Respond to Lets look at Japan as a key element in the global soup. Why is there a "carry trade" in the first place? The carry trade is an outcome of Japan's bubble. Their bubble was based on their gigantic trade surplus. Their giant trade surplus enabled them to lower interest rates in an effort to keep the yen from soaring. Lower rates enabled people in Japan to borrow at 0% to speculate on real estate, both in Japan and outside of Japan -- for example in Hawaii. In other words, the Japanese bubble stemmed from its trade surplus and high savings rate -- and those two elements blew their bubble. When Japanese property crashed it left the banks insolvent -- the entire lending scheme in Japan, including the collateral used by Japanese companies to back their bank loans, evaporated. Every bank was bankrupt in a mark to market environment. Japan, being Japan, did nothing to face up to this. They decided to wait it out -- and the carry trade became a way to wait it out and "fix" the problem a bit at a time. Meanwhile the Japanese government spent money at an unheard of rate -- and to no avail. To this day, Japan fears the yen -- and its eventual rise.
