The Japanese Carry Trade Cycle Could Potentially Get Worse #japan #globalnews #shorts #nyse #nasdaq
Gary Brode of Deep Knowledge Investing and Robb Fahrion of Flying V Group discuss the 5 Things to Know in Investing This Week: The #trump #bitcoin Issue
-Bank of Japan raises rates…to .25%. Now solidly above zero!
DKI Summary:
The Bank of Japan (BOJ) announced this week they will raise interest rates to 0.25% from the previous range of 0.0% to 0.1%. This decision follows three consecutive months of core inflation growth. Meanwhile, the Federal Reserve’s signal of potential rate changes in September has weakened the dollar and comparatively strengthened the yen. The yen is up on the new rate hike, the U.S.’s coming cuts (sooner rather than later), and the $36.8 billion currency intervention by the BOJ throughout July. Due to rising inflation, Japanese bankers signaled a more hawkish stance, indicating they might raise rates further, but they are not ruling out additional rate cuts this year.
DKI Takeaway:
The BOJ faces a challenging situation with GDP decreasing in Q1 while inflation rises. Their 2016 attempt to boost the economy with negative interest rates did not address the underlying issue, leading to a debt-to-GDP exceeding 260%. Looking at the chart above, Japanese GDP grew from 520 to only around 550 in the 16 years since they last cut rates to zero. Although the U.S. also has a growing debt-to-GDP, its economic growth allows it to manage higher rates temporarily. If the BOJ continues to raise rates, their interest expense will significantly increase, consuming a larger portion of GDP and leading to more inflation-causing currency creation. Japan is trapped where neither higher nor lower interest rates will solve their problem. I would reduce spending and implement significant government cuts, like Milei’s approach in Argentina. We should try that here in the US as well.
Your links:
This week’s written version of the 5 Things with graphs:
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