Liberal Japan

Note that carry trades should not really exist for any discernible amount of time. Interest weight fluctuations should be reflected in currency values.

So why is the following happening –

Investors have resumed selling yen as part of the so-called carry trade, buying higher-yielding currencies with funds borrowed in Japan, where the benchmark overnight rate is 0.5 percent. This strategy unraveled, causing the yen to rebound from a 4 1/2-year low starting in June, when a sudden global surge in the cost of credit led investors to trim risky bets. (Bloomberg)

I don’t know how this is working, but I do know that if the sub-prime market begins to fall — are any serious trouble hits the American market — there will be a rush for the door to get out again. It’ll be worse than last time and the yen could make it to 100.

However, so far the Fed in America has decided on an inflationary policy, which will allow people who can’t afford to pay for their mortgages to struggle on a bit longer, and will fuel investment (wise or otherwise).

While its impossible to know the timing of events (we’d all be rich if we could), the long term prospects for the yen mostly good. Japan is the world’s biggest creditor, and it’s still running a heck of a trade surplus.