Japan's Future

This past quarter Japan's economy grew at an annualized pace of 5.5%. That is over double the U.S.' 2.2%. A large part of the higher than anticipated growth is said to be due to a strong increase in capital spending. Tech companies such as Tokyo Electron Ltd. and Canon Inc., are planning to build new factories this year. This will result in continued high numbers of GDP growth. Also, consumer spending has been strong as well.

So what does this all mean for the global economy? Well, a group of Japanese economists have set a desired goal for short term lending rates at 2%. That's 4x the current .50%. Let's talk about some of the politics of this whole thing. The most recent GDP growth statistic that came out was 5.5%. Inflation was a measly .1%. Side note: Last year the central bank of Japan (BoJ), took a page out of Clinton's book and their official CPI slid .50%. There inflation is definitely low, but not .1% low. After the Asian Crisis, deflation is still fresh on the minds of the Japanese. Higher short term interest rates means lower inflation and a stronger Yen. Their GDP numbers cry for an interest rate hike, while their CPI says no way.

For Japan to be economically respectable at all, they have to have higher interest rates. But, I promise you that the main worry, more important than the above mentioned, is the Yen carry trade. Higher interest rates will result in a ton of liquidity being ripped from the market. I mean, you saw what happened after the 25 point hike from .25% to .5%. So the same folks who decided to tamper with the Japanese CPI in order to prevent an interest rate hike, are very worried about the next 6 months in the Japanese economy. This will be very interesting to watch, but there is at least 1 or 2 rate hikes to be expected by the BoJ this year. Stay tuned, because right now this is the biggest story in global economics.