A U.S. Economist Warns, Close the Yen Carry Trade Before It's Too Late
May 23 (LPAC)--In a surprising editorial in the Japan Times , Thomas Palley of the U.S.-China Economic and Security Review Commission, calls on Japan to shut down the "dangerous" yen carry trade before it triggers "global contagion" upsetting the world financial markets. Most notably, Palley says it is this carry trade--and not the value of the Chinese yuan, which is triggering huge trade imbalances with the United States, and "generating worldwide asset inflation." Palley also says the carry trade has pressured other Asian countries to undervalue their currencies, costing jobs and growth elsewhere in the world.
In late February, economist Lyndon LaRouche warned the yen carry trade was a burning fuse for a global financial blowout. Palley's May 23 warning comes only one day after Asahi Shinbun , the major Tokyo daily, editorialized on the same danger. But Asahi Shinbun's editorial attributes the danger to unregulated hedge funds, which it said are now dominating this carry trade. Palley blames the low-interest-rate policy of the Bank of Japan and monetary authorities.
The yen carry trade is a huge, perhaps $700 billion-$1 trillion engine for worldwide speculations, done with cheap borrowed yen "carried" to every capital market and speculation in the world. Palley attacks this trade for threatening to trigger a general crisis: "the carry trade generates global financial fragility by creating fundamental--and dangerous--mismatches.... Unexpected yen appreciation could cause large exchange-rate losses.... Such losses, or just the thought of them have the potential to trigger global contagion."
Adding a number or arguments to the effect that closing the interest-rate gap between Japan and the rest of the OECD countries--i.e., ending the carry trade--would benefit Japan's own economy and population--and concludes, "Japan should decisively abandon ultralow interest rates."