Japan’s rate hike risks unwinding carry trade - What it means for Azerbaijan? |
The global economy has entered a new and potentially more complicated phase in monetary policy. The U.S. Federal Reserve raised its federal funds target range by 25 basis points to 3.75%-4.00%, and the Bank of Japan followed with another rate increase, lifting its benchmark rate from 1.00% to 1.25%. The BOJ's latest move takes its policy rate to the highest level in more than three decades.
Japan's rate decision is particularly important because the impact of its monetary policy extends far beyond the Japanese economy. While a Fed rate hike usually puts pressure on emerging-market currencies and financial conditions, changes in Japanese monetary policy can affect global capital flows through a different channel: the carry trade.
There is a long-standing joke in economics that there is the global economy and then there is the Japanese economy, because some of the rules that normally apply elsewhere have worked differently in Japan. For decades, Japan maintained exceptionally low interest rates while carrying a very high public debt burden. This created an unusually cheap funding environment for investors.
The carry trade developed around this environment. Investors could obtain funding in yen at relatively low costs and invest in assets offering higher returns elsewhere, including U.S. government securities, equities and emerging-market financial instruments. Turkiye, Mexico and other higher-yielding markets have been among the destinations for such strategies. The return can come from the........