Monday, March 5, 2007

How Fast Will the Carry Trade Go Away?

From Seeking Alpha:

Japan's Ministry of Finance reports Q4 (ended Dec.) capital spending increased 16.8%, beating the prior quarter's reading of 12.0% and analysts' estimates of 13.0% to 14.2% (Reuters). Up to a 1.0% revision to Q4 GDP is expected. Jesper Koll, chief economist at Merrill Lynch Japan, says annualized Q4 GDP will be revised to 5.1% from 4.8%, adding that "It is a trigger point for the Bank of Japan to normalize interest rates a little more aggressively." Bloomberg quotes Koll who also says, "The crisis of the 1990s is definitely over. Japan is in the process of building a strong platform for very strong, competitive economic growth." An economist at Nikko Citigroup however, says a revised GDP is not necessarily good due to concerns over rising inventories which "may prompt adjustments in production in coming months." The yen rose 1.7% today to ¥115.6/$1 as of the market's close in Tokyo. Japanese stocks meanwhile fell for a fifth straight day, as the Nikkei 225 lost 3.3% to 16,642.

The difference between Japanese and US interest rates is still large -- to the tune of 500+ basis points. However, even the hint of the carry trade (borrowing in Japan and lending in the US) going away has serious implications for the US and Japanese markets.