Fallout: The Financial Crisis

How the global crisis boosted the yen

Bob Moon Oct 27, 2008
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Fallout: The Financial Crisis

How the global crisis boosted the yen

Bob Moon Oct 27, 2008
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TEXT OF STORY

Kai Ryssdal: Any discussion of the international currency markets inevitably leads to something known as the carry trade. Sounds complicated. And it can be. But think of it this way and it’s not quite so painful. You borrow a currency on which interest rates are low. Say the Japanese yen. Then you invest where rates are high. Or higher, anyway. Since rates in Japan have been low for years now. Then you pocket the difference. Works real well in normal economic times. But not so good when things go wrong. Like, say, today. Our senior business correspondent Bob Moon takes it from there.


Bob Moon: There’s a reason investors suddenly have a yen for yen. As Axel Merk of the Merk Funds explains it, investment funds and businesses have been living on borrowed money, now have to pay the piper.

Axel Merk: People were borrowing massive amounts of money in Japan, where interest rates are very low, to buy higher-yielding riskier assets. And right now, those trades are being unwound, and they have been unwound for many many weeks now, and it will only stop when the selling stops.

Much of that borrowed yen went to emerging economies where it was invested on the promise of higher returns. Now in the rush to raise cash it’s being converted back into yen. And David Gilmore of Foreign Exchange Analytics says the losing countries are watching helplessly as their currencies implode.

David Gilmore: It stretches all the way to places like Mexico, Brazil and Hungary; and the Ukraine, Europe, Canada, it’s sort of across the planet.

Having a more expensive currency isn’t good news for Japan either. Businesses there depend on cheaper exports. And now that cash is king–specifically, having cash safely in hand–investment strategist Axel Merk says there’s less of it being spent where it’s needed: on economic growth.

Merk: That impedes trade–that people are just paring down their investments. And that’s happening on a global scale. We’ve seen it in the equity markets, we’ve seen it with the lack of access to credit. And now the currency markets are emphasizing that and making things worse for everybody.

Merk says it’s just another symptom of the world’s economic ill-health.

In Los Angeles, I’m Bob Moon for Marketplace.

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