about 1 year ago • 2 mins
The Bank of Japan (BoJ) stunned markets on Tuesday after switching up its deep-rooted deflation-fighting policies.
What does this mean?
“Inflation” could be most of the globe’s word of the year, but Japan’s been focusing on the exact opposite for decades now: deflation – yup, falling prices. That might sound like the dream these days, but – believe it or not – it’s actually a bigger problem than inflation. It’s such a problem that Japan brought in an interest rate control policy back in 2016, allowing the country’s government to load up on cheap debt and keep spending to stimulate the economy. The BoJ seemed to stick to those guns just last week, saying it would be premature to shake up those policies without evidence of inflation-fueling wage growth. So it was pretty shocking when the bank announced that it’s now lifting its interest rate cap, signaling that it could be more concerned about inflation than deflation. No wonder stunned financial markets sent the Japanese yen skyrocketing against the US dollar after the news.
Why should I care?
For markets: America’s watching.
The “carry trade” is a common tactic that involves borrowing in Japan at cheap rates, changing that borrowed yen into dollars, investing the dollars into US government bonds with higher rates, and pocketing the difference. That makes traders a quick buck, but it hurts the yen against the US dollar. Now the yen's on the rise, though, carry traders might throw their strategy into reverse – giving Japan’s currency another leg up. Now, that could really tempt any US investors with wandering eyes…
Zooming out: We can’t afford this.
Japan’s built up a Mount Fuji-sized pile of debt over the years, and with IOUs totalling nearly 250% of the economy, it’s the most indebted country in the world. So let’s be real, the BoJ’s unlikely to start jacking up rates at the same pace of its American central bank counterpart anytime soon.
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