Japan Interest Rate Financial Crisis | Business | Sarthak Ahuja

Japan Interest Rate Financial Crisis | Business | Sarthak Ahuja

Something so big has happened in Japan today which has set off alarm bells around the financial world and you have to understand what is happening. Well, for the past almost three decades, you could borrow in Japan at just about 0%. So what was everyone doing? All major financial institutions as well as people in Japan, they would borrow money at just about 0% and invest it elsewhere in the world. For example, if they would buy US bonds, they could make 3 4% peranom. If they would invest in US equities they could make about 8% peranom. If they would invest in say bonds in India they could make about 6% peranom and everyone was having a jolly good time because even after removing expenses of you know currency conversion forex fluctuation and everything people were still making about 3 4% because money was available to borrow at 0% interest rate. But that has now changed. In fact today on the 19th of November interest rates in Japan have reached almost 2.8% 8% which is possibly the highest interest rate in the past almost 25 years and you have to understand what this has done. Well, if people were making just about 3 4% by doing this suddenly, you know, now they’re losing out on almost 3% and their entire profit margin could be wiped out if there is any more increase in this interest rate. Which is why the financial world has gone into massive panic because Japanese, you know, not just institutions but financial institutions around the world would now want to sell off their investments in US equities and repay the debt in Japan. And if that happens, the stock markets could actually crash. But what you must also understand is why is it that suddenly the interest rates in Japan have gone up? Because inflation in Japan has gone up by over 2.5%. But inflation in wages has been practically equal to zero. You know the real wage rate has been negative. And the Japanese government to curtail that is increasing interest rate. Which is why there are two objectives in finance. One is wealth creation. The other is wealth preservation. And you must at this time in the world focus on wealth preservation because times are risky. and share it with someone who may need

More than America, now Japan has become a bigger worry for the finance world… and here’s explaining what has happened simply…

For almost 3 decades, the rate of borrowing in Japan was as low as almost 0% (think 0.1%)…

While investment in US bonds would give close to 4%… US stock markets would give close to 8%… and investment in bonds in India and other emerging markets could also deliver 6-8%…

So financial institutions around the world and the Japanese Govt would borrow money from Japan at almost 0 interest rate… and invest it internationally in the US and other markets… where even after removing cost of currency conversion, transaction charges, forex fluctuation hedging, the trade would be profitable…

This was called the “Yen Carry Trade”… where “carry” essentially means benefiting from the low interest rate…

Now, on the 19th of November, the borrowing rate in Japan has increased to almost 2.8%…. and if it touches 3%, their economy could go into a big problem as they would not be able to pay all the debt that they have which is at almost 2.5X their GDP

Which is the highest rate in thirty years… and this is catastrophic… because suddenly everyone who was easily making 3-4% through the Yen Carry Trade is now seeing their margin completely wipe off if the interest rate rises any more…

And this is freaking out investors who may want to sell their holdings in the US market to repay the Japanese debt…

But the bigger thing to understand is that why has Japan suddenly increased rates after thirty years!

This is because for the first time in almost 25 years, inflation in Japan has crossed 2.5%… while real wages have barely grown… and to curtail inflation, the economy needs to increase interest rates to make borrowing tougher for the market…

Even in August 2024, the Yen interest rates were increased to 0.25% from 0.1%… and the finance community had gone into hysteria with the Nikkei having fallen 12% in a single session before recovering…

Again, no risky bets at the moment. Protecting your capital should be a bigger motive right now than trying to exponentially grow it.

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A Chartered Accountant with about 10 years of experience in areas of Tax Advisory, Startup Consulting, Fundraising, Audits, Deal Advisory, Business Modelling and contract CFO services.
Winner of the ISB Young Leader Award 2017 and the Best All Rounder, PGP Class of ’17, Sarthak has also been published about in the leading financial newspapers such as The Financial Express as possibly the youngest Indian to have completed the courses of CA, CS and CMA along with a graduate degree in Financial & Investment Analysis from University of Delhi, all by the age of 23 years.