In support of China's rate cut

Why do I support the rate cut in China and not in Japan?

In China, the rate cut will act like it's supposed to and truly leave more money in people's pockets by lowering their interest payments. The rate cut ties in nicely with China's previously announced $586 billion stimulus package. This package, presented with clear goals, is understandable to the markets.

Japan's rate cut exacerbates the way investors treat the yen. Amateur currency trading has exploded in recent years as Japanese investors sought better returns than their own banks were providing. Known as the yen carry trade, the idea is to sell yen to buy higher-yielding currencies. It's been very profitable until the recent market downturn. Nervous traders started buying back yen and drove the currency value up, making exports more expensive. You see where this is going...

Even though interest rates around the world are lower, Japan is still one of the lowest, so I fully expect the yen carry trade to kick into high gear again soon.

It would also be helpful if Japan provided some clarity to their stimulus package...




Source:
Wall Street Journal, November 28, 2008.