Japan all set to charge interest


A little over a month ago, increase in the US interest rates triggered off a meltdown in stock markets around the world. Now Bank of Japan is expected to give up its zero percent interest rate policy for the first time in five years. It is expected to raise its interest rates to a nominal 0.25%. The question every one now wants answered is this: Will this hike trigger another round of market collapse the world over? The question is a valid one for two reasons.

After many years of deflation, the Japanese economy has shown signs of recovery in the last three quarters. Consumers have been spending more while Japanese corporations have been borrowing more money to expand their business.

A couple of months ago Japanese bank lending clocked the highest growth in history after having recorded 10 straight months of growth. Analysts say that the growth in the Japanese economy has been one of the significant reasons why the global economy posted better growth rates.

They now fear that the increasing bank rates in Japan can slow down this growth even before it has gained momentum. The ripple effects will be felt soon in the stock markets and this can depress world markets at least in the short run.

Secondly, as the Bank of Japan (BOJ) has been literally lending money for free, there is a view that smart hedge funds have been borrowing money from Japan and investing elsewhere to make a fast buck. The model became even more lucrative in the recent past as interest rates in the US increased.

There are also persistent rumors that hedge funds borrowed from Japan and invested in risky emerging markets including India. The fear now is that any sustained increase in Bank of Japan’s interest rates will see these hedge funds withdrawing money from the more risky market causing yet another round of all.

As analysts wait nervously for BOJ’s announcement, there is also a view that the increase in rates will actually stabilize the global economy in the long run. Today, money costs anywhere between 2.75% in Europe to 5.75% in Australia in developed economies, with Japan being the odd one out.

Economists feel that over a long period of time, the increase in Japanese rates will level the playing field and protect global markets from players who make undue advantage of free money from Japan.