Point of View

Japanese shift may hurt global markets
From Leo Lewis in Tokyo

A CHANGE in Japan’s ultra-loose monetary policy could trigger a “devastating” domino effect that would decimate commodities, real estate and other assets around the world, analysts say.
The shift away from quantitative easing, which some expect the Bank of Japan to signal this week, would also foreshadow an end to the central bank’s five-year zero per cent interest-rate policy.

The yen has been the world’s cheapest currency to borrow over the past five years and investors have exploited the so-called “yen carry trade” to finance purchases around the world. Analysts now believe that the yen carry trade may be behind a series of speculative bubbles that have inflated in recent years and soon could cause a shock.

With Japanese interest rates rising again, investors will be tempted to close their yen positions by selling themselves out of the related investment.

Trophy real estate and fine art are thought to be minor examples of such bubbles, but some believe that yen borrowing has been used to bolster a wide range of metals and other commodities.

Some economists describe the deterioration of the yen carry trade as “nothing short of a paradigm shift” for global financial markets and that commodities are vulnerable. Another cause for concern is a big squeeze on the yen itself, pushing the currency sharply higher against the dollar.

Jonathan Allum, a strategist at KBC Japan, the stockbroker, said: “If rates rise in Japan, these trades will be unwound and thus short yen positions will be closed while long positions will be liquidated. The weight of money invested in variants of this strategy is said to be humungous and thus as the yen recovers we could see the serial collapse of little speculative bubbles over the world.”