After the implosion of the Japanese asset bubble in the early 1990s, Japan set effectively 0% interest rates in an effort to stimulate the economy. This led to what's known as a 'carry trade', where investors would borrow free money from Japan, and then invest it in higher-yield investments abroad.
After the collapse of the American equity markets in 2001, higher yields were hard to come by. So, all that liquidity went looking for a new home and largely landed in mortgage-backed securities, credit default swaps, and their associated derivatives. Of course, a lot of these investments yielded only a few percent, so investment funds would often leverage up 20x-30x to get a respectable rate of return.
When those investments started to unwind, they unwound hard. The end result was that the Japanese carry trade contributed to the eventual devastation of the American financial system. Which, ironically, means that we now have 0% interest rates. The great cycle continues.
Now, the Japanese carry trade certainly isn't the whole story, and there's a lot of other factors that were in play. However, there's no doubt in my mind that the BOJ's 0% interest rates helped us dig the hole that we find ourselves in today.
After the implosion of the Japanese asset bubble in the early 1990s, Japan set effectively 0% interest rates in an effort to stimulate the economy. This led to what's known as a 'carry trade', where investors would borrow free money from Japan, and then invest it in higher-yield investments abroad.
After the collapse of the American equity markets in 2001, higher yields were hard to come by. So, all that liquidity went looking for a new home and largely landed in mortgage-backed securities, credit default swaps, and their associated derivatives. Of course, a lot of these investments yielded only a few percent, so investment funds would often leverage up 20x-30x to get a respectable rate of return.
When those investments started to unwind, they unwound hard. The end result was that the Japanese carry trade contributed to the eventual devastation of the American financial system. Which, ironically, means that we now have 0% interest rates. The great cycle continues.
Now, the Japanese carry trade certainly isn't the whole story, and there's a lot of other factors that were in play. However, there's no doubt in my mind that the BOJ's 0% interest rates helped us dig the hole that we find ourselves in today.