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.

It's a wild ride - and the Japanese feel like buying

Yesterday, Japan's Nikkei stock index fell 1,089 points or 11.4 percent, which was the largest drop since 1987. Today it gained 235 points, or 2.78 percent. The final number was just over 8,693. A few weeks ago the index was over 12,000. Investors know that the stocks are undervalued and there's bargains to be had, but just like everywhere, they are a little scared to jump in.

Citing the need to help take the edge off high fuel prices for farmers and fishermen, the Japanese parliment approved US$18 billion (1.8 trillion yen) to partially finance an economic stimulus package. Japan had actually crafted this stimulus proposal in August before the US financial crisis hit.

The general consensus is that Japanese investors are calm, concerned, but calm. And they are feeling good because they have a lot of money. Estimates put domestic household financial assets at $15 trillion, and half of that sits in bank deposit accounts. The Japanese are among the world's biggest savers and now they are thinking about buying.

Some Japanese politicians are suggesting that Japan invest in U.S, troubled assets. Japan has a great deal of cash, and obviously, the U.S. does not. The idea was couched in the terms of helping a needy ally. Of course, they would profit by holding the assets long term, especially after scooping them up at fire sale prices.

The Daily Yomiuri reported that the private sector was already on a buying spree. "Nomura Holdings bought the Asian and European divisions of failed investment bank Lehman Brothers. Mitsubishi UFJ Financial Group completed its US$9 billion purchase of a 21 percent stake in Morgan Stanley this week."