Japan Dreads Interest-Rate
March 5, 2006 (EIRNS)—This is the message from Tokyo, regarding the Fed's increase in interest rates and the crisis in the carry trade. From 1997 to 2005, Japan consumer prices were falling 2.6% yearly on average, so the Bank of Japan (BOJ) began flooding Japan's banking system with zero-interest cash in 2001. Starting with his Nov. 21, 2002 speech, "Deflation: Making Sure 'It' Doesn't Happen Here," Benjamin Bernanke, then a Governor of the U.S. Fed, demanded that Japan extend this 'service' to the U.S., by buying an average of $300 billion a year in Japanese and U.S. government long-term Treasury Bonds. When central banks buy banks' government long-term bond inventory, it injects that cash into the banks and "lowers the yield curve"; in Japan, it pushed interest rates below zero. The proceeds from the bonds were spent to cover the infamous tax cuts such as the Bush cuts here, and in Japan. Thus Japan, and later China, became the unhappy owners of nearly $1 trillion in U.S. bonds apiece.
This was enforced by cascading neo-con crises in North Korea, Iraq, Iran, etc., a Japanese diplomat told EIR. "Many of those who disagreed with the [Bernanke] policy were silenced by the fact that we had to keep Washington happy, to prevent North Korea or Iran [Japan's major source of oil] from blowing up," he said. Every time Cheney kicks North Korea, "Japan feels a nuclear gun" in its back, this source often says.
But the Fed's 2005 rate increase from 1% to 4.5% magnified the inflationary shock-wave worldwide (on top of oil and commodity speculation), Japanese financial officials warned EIR this week. Even Japan's consumer prices rose by 0.5 percent in December and January, so the BOJ meets March 9, AFP reports, "to consider scrapping its ultra-loose monetary policy." Whether BOJ will start April 1 to merely reduce the rate at which it has been "force feeding" cash into Japan's brain-dead banks, or whether it will tighten the spigot enough to actually raise the BOJ rate above zero, is in debate.
AFP reports (as do EIR sources) that the big worry in Tokyo is: "What happens to the Japanese economy once interest rates become 'normal'?" Will the yen shoot up, the dollar collapse, and Japan's exports evaporate, causing major industrial firms to close? Which Japanese banks and corporations will go under when simply forced to pay interest to borrow? What programs will be gored if Japan's government must pay interest on its own huge deficit caused by this global lunacy?
Even if the BOJ raises rates to 1.5%, there will still be a 3% margin between Japanese and U.S. rates "for some carry traders," one source noted—but long before Japanese rates make such an enormous swing from negative 1% to positive 1.5%, "you'll hear screaming all over Tokyo." But long before that, hedge fund operations in the global market may blow sky high—blowing out the world system.