The global economy has enjoyed a sustained period of growth; prices have risen across a range of asset classes, suggesting a degree of blanket investing, with gold and bond prices rallying along-side equity indices. A major reason for this has been the degree of cheap money that has entered the global money supply over the past five years. It is in times like these that individuals who in normal circumstances would find credit restrictions too stringent are enjoying greater access to debt. Consequently, we have seen recent market volatility in the wake of growing fears about the quality of US sub-prime borrowing. One notable source of this cheap money has been the Japanese ´carry trade´.
The low level of interest rates has made investors less risk averse and encouraged greater levels of debt, not least yen-denominated debt. While it is difficult to measure liquidity, economists have estimated that the global supply of US dollars has risen by an annual average of 18% over the past four years. With the low Japanese interest rates helping to underpin the investment boom, it is interesting to note that the Japanese investors were eager to invest in Japanese property when it was at its height in the 1980s and are now investing in foreign assets when the Yen is at record lows. The concern for the markets must be that, either through an event like the ruble crisis in 1998, or a more demonstrative recovery in the Japanese economy, that a yen rally triggers a rush to unwind the ´carry trade´.
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