What going on in Japan? | Forex Factory

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What going on in Japan?

  • #1
  • First Post: Edited 11:15am Jul 8, 2007 10:40am | Edited 11:15am
I was discussing the carry trade with a friend and we both found our selves wondering how can they keep interest rates so low. Is borrowing over there so low? Do they have vast oil fields or made a new deal as oil prices is a major inflationary measure? Or is their government so corrupt they don't give a damn? There must be a catch.

Thanks
  • #2
  • Jul 8, 2007 1:02pm Jul 8, 2007 1:02pm
Hi Scientist,

I don't know the official answer, but I have a few thoughts that may or may not be considered valid reasons for the low interest rates:

1) Japan has an enormous amount of personal savings available to lend. The available money supply exceeds demand, and results in a very low overnight borrowing rate. Once the consumer starts to withdraw some of their savings and starts to spend it on non-essential items (i.e. vacations) the supply will dwindle. Consumers may also start to borrow more and increase demand for funds (less savings available to lend) then interest rates would increase.

2) Japan is heavily dependent on imported oil. As the cost goes up, inflationary pressure also increases. However, Japan is still walking a tightrope from the deflationary years...and doesn't want to induce another economic crisis as seen after the stock market crash/real estate crash.

3) The low interest rates are a huge benefit for Japan, as it keeps the yen weak and boost the global demand for goods manufactured in Japan because it is very affordable to it's trade partners.

Economic data suggests that the Japanese economy is recovering nicely, but mixed data still exists. Because of the "emotional" implications of a decade of financial hardship, the population has established a cultural means of insuring their financials are OK by not spending unwisely. This will be difficult to change as the consumer has a savings mindset rather than a spending one (as seen in the USA).

I hope that I have presented my simplistic ideas well enough. Don't really have much background in the Asian economies, but I found your question fascinating -- hope others with more knowledge can add to the discussion.

Thanks for posting the question!
  • #3
  • Jul 8, 2007 1:02pm Jul 8, 2007 1:02pm
Let me preface the following by saying:
My studies on global economics is still in its infancy and I invite others more versed on global economics to comment.

Lets say a US bank borrows a 100 million US in Yen from a bank in Japan and then loans it to their US customers in the form of a bank mortgage on a house, cars, business loans, etc. The loan created 100 Million US yen when borrowed.
I see this as similar to a company creating more stock to sell in order to get additional money for expansion.
It appears that the above arrangement is good for both the US bank and the Japanese bank. As the 100MUS Yen returns to Japan in the form of repayments, or purchases of goods,etc. It stimulates both the industrial and financial side of the Japanese economy.
The US bank is making a considerable profit at borrowing at a much less rate than it can get from the Fed, yet still loaning at Fed inspired rates.
In trading, there is no bullshit. You either make money or you don't.
  • #4
  • Jul 9, 2007 2:02am Jul 9, 2007 2:02am
Quoting pips4uandme
Hi Scientist,

I don't know the official answer, but I have a few thoughts that may or may not be considered valid reasons for the low interest rates:

1) Japan has an enormous amount of personal savings available to lend. The available money supply exceeds demand, and results in a very low overnight borrowing rate. Once the consumer starts to withdraw some of their savings and starts to spend it on non-essential items (i.e. vacations) the supply will dwindle. Consumers may also start to borrow more and increase demand for funds (less savings available to lend) then interest rates would increase.

2) Japan is heavily dependent on imported oil. As the cost goes up, inflationary pressure also increases. However, Japan is still walking a tightrope from the deflationary years...and doesn't want to induce another economic crisis as seen after the stock market crash/real estate crash.

3) The low interest rates are a huge benefit for Japan, as it keeps the yen weak and boost the global demand for goods manufactured in Japan because it is very affordable to it's trade partners.

Economic data suggests that the Japanese economy is recovering nicely, but mixed data still exists. Because of the "emotional" implications of a decade of financial hardship, the population has established a cultural means of insuring their financials are OK by not spending unwisely. This will be difficult to change as the consumer has a savings mindset rather than a spending one (as seen in the USA).

I hope that I have presented my simplistic ideas well enough. Don't really have much background in the Asian economies, but I found your question fascinating -- hope others with more knowledge can add to the discussion.

Thanks for posting the question!
Agree. Bored house wives don't want to go on holiday any time soon. They too busy getting their jollies playing on the markets with their savings.
  • #5
  • Edited 9:51am Jul 9, 2007 3:16am | Edited 9:51am
Quoting pips4uandme
Hi Scientist,
1) Japan has an enormous amount of personal savings available to lend. The available money supply exceeds demand, and results in a very low overnight borrowing rate. Once the consumer starts to withdraw some of their savings and starts to spend it on non-essential items (i.e. vacations) the supply will dwindle. Consumers may also start to borrow more and increase demand for funds (less savings available to lend) then interest rates would increase.
nope, it's the other way arround. If money supply is greater then money demand this means inflation, thus means big interes rates to take that surplus of money from population to the bank-system (nzd and gbp are facing this problem).
Japan, by having such a small interes rate means they are fighting deflation(the reverse phenomen to inflation), and they want people to borrow their money.
I think Fumafuma need to answer the original question, I see he has some exceptional Japanese fundies.
PS. interest rate is considered to be the cost of money. low interest rate = cheap money
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #6
  • Jul 9, 2007 7:39am Jul 9, 2007 7:39am
Disinflation is distinct from deflation.

Disinflation means a slowing in the rate of inflation. deflation means that the rate of inflation is de-facto negative.

Deflation is a contraction in the volume and velocity of money and credit relative to available goods.

Say inflation is high, and an asset and credit bubble is forming. To curb inflation a central bank increases interest rates.

The outcome of such a tactic, however, may serve to pop these bubbles.

Higher borrowing costs leads to a contraction in the velocity of money. Since all those using credit now must pay more to service their debt and less money is spare to purchase the goods produced on the basis of the high credit nature of the economy.

Not only does a higher borrowing cost dissuade people from borrowing, it also dissuades people from purchasing.

We now have an economy in which many are in debt and where production is outstripping demand.

So production is scaled back and prices fall in order to maintain the general equillibrium between demand and supply.

While this may work in certain circumstances, however, the response of an economy to the bursting of an asset bubble may be less smooth. Production of luxury commodities, for example, may no longer be wanted at all in the current climate. So factories shut, unemployment rises and basic wages trend lower.

As wages trend lower and businesses close, however, there is less available money to service debts and many default.

Since debt is money bankruptcy and default essentially leads to a further fall in the money supply.

We are in a deflationary spiral.

Defaults and fear of defaults leads to an even greater insecurity on the part of lenders to lend money, and on the part of borrowers to borrow.

demand declines further, production declines further, as does price.

Imagine a point now, where price has become so low that it does not service the cost of production. It started in luxuries, but has now spread.

Businesses can no longer run, so are liquidated. Banks recieve assets which are now much less than their value when loans were made. If they attempt to sell these assets, they further increase supply and thereby reduce price further.

While all this is going on, however, the central bank is not idly lazing around playing poker and sailing yachts.

They are busy reducing the interest rate in order to stimulate borrowing and lessen defauls/bankruptcy, and to stimulate demand for credit.

At some level interest rates will become so low as to become attractive again and the deflationary period ends.
quote of the day: . It's like deja-vu all over again
  • #7
  • Jul 9, 2007 9:49am Jul 9, 2007 9:49am
Quoting semar
nope, it's the other way arround. If money supply is greater then money demand this means inflation, thus means big interes rates to take that surplus of money from population to the bank-system (nzd and gbp are facing this problem).
Japan, by having such a small interes rate means they are fighting disinflation(the reverse phenomen to inflation), and they want people to borrow their money.
I think Fumafuma need to answer the original question, I see he has some exceptional Japanese fundies.
PS. interest rate is considered to be the cost of money. low interest rate = cheap money
my mistake, i meant deflation
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #8
  • Jul 9, 2007 10:09am Jul 9, 2007 10:09am
Quoting Gmak

At some level interest rates will become so low as to become attractive again and the deflationary period ends.
So what you are saying is Japan is out of a long recession cycle, fighting inflation again since they started hiking interest rates?

Very interesting. Thanks for posting.
  • #9
  • Jul 9, 2007 2:43pm Jul 9, 2007 2:43pm
Quoting Scientist
So what you are saying is Japan is out of a long recession cycle, fighting inflation again since they started hiking interest rates?

Very interesting. Thanks for posting.
I think Japan is in deep sh#t. And pips4uandme, I agree with your thoughts 100%.
Although evertbody is making us believe the era of deflation is coming to an end, recent data still shows deflation. But more important, deflation is still very much part of the japanese psyche. Goods are not being replaced unless broken and every penny is saved although there's no interest earned on the savings accounts. Yet only 3% of those savings is apparently send overseas. And as long as they don't start spending, deflation stays just around the corner, despite of the impressive economic expansion.
The main reasons for the japanese reluctance to spend that I see are: an aging population and the record public deficit. Both are not helpful to restore the common man's confidence in the future.
To tackle those, financial and tax reforms are badly needed; if (or rather when) interest rates rise, the government budget will spiral out of control. Former prime minister Koizuma initiated reforms but the current administration is falling behind. Prime minister Abe is loosing popularity fast and with upper house elections around the corner, the political climate won't allow them to make difficult decisions.

So it seems that they'll try to keep the economy going by keeping the yen cheap and interest low (or at least lagging behind the increases in the rest of the world) and hope that the ppl start spending.
  • #10
  • Jul 9, 2007 5:01pm Jul 9, 2007 5:01pm
At the moment I see the Japanese economy as at a pivotal moment. Signs are there that inflationary pressures are picking up, but if you cast your eye back over the last few months economic data, you will find it is pretty much a mixed bag.

Japenese financiers are at best cautiously optimistic. I can't see too many rate increases round the corner.
quote of the day: . It's like deja-vu all over again
  • #11
  • Last Post: Jul 9, 2007 5:11pm Jul 9, 2007 5:11pm
Simple weak jpy make more profit for japan business where they take those profit to sell more jpy etc etc...Also top financial are involved in that kind of forex manipulation as they have own interrest in that practice!
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