Japan’s revenge

Over at Project Syndicate, Thomas Palley outlines the argument about how the yen carry trade is fuelling global asset bubbles — although Finance Minister Omi denies that Japan’s low interest rates are the cause of the carry trade.

Aside from rehearsing the standard arguments about how Japan’s barely-over-zero interest rates contributes to global instability and the appreciation of the dollar, Palley also suggests that Japan’s lagging growth in consumption could be corrected with an interest rate hike because a hike could signal to Japan’s elderly that their income is safe over the long term: “Current ultra-low interest rates may be scaring people about the adequacy of future income. Raising rates could alleviate those fears, increasing consumer confidence and spending.”

In Chicago on business this week, I had a conversation with my father — whom I should probably have write here from time to time — about the global risk environment, and he noted wryly that the carry trade is Japan’s revenge for the 1987 Louvre Accord, which mandated that Japan permit the yen to rise as the dollar fell, correcting for the overshooting of the 1985 Plaza Accord. The outcome of the Louvre Accord was Japan’s asset bubble, bringing us — after the interlude of a “lost decade” — to where we are today, with Japan in no hurry to be the first to alter its monetary policy to correct global imbalances.

Will the Bank of Japan raise interest rates again? Knowing Fukui’s eagerness to “normalize” Japanese monetary policy, it seems like a matter of time — although probably not until after July’s Upper House elections.

The one certainty though is that it will be at a time of Japan’s choosing, not the product of pressure (in the G7 for example) to alter its policies to carry a greater share of the burden of global readjustment.

And all that is a long way of saying that I’m back in Japan, after an unplanned overnight stay in San Francisco, so my posting will be back to normal

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