Amidst Feud Between Politics and Economics BOJ Raises Interest Rates from 0.25% to 0.5%

HONG KONG (MarketWatch) — The Bank of Japan’s policy board voted by an 8-to-1 majority to lift its overnight call rate by a quarter percentage point, bringing the benchmark lending rate to 0.5% Wednesday. The BOJ said the Japanese economy is likely to continue expanding moderately, noting that positive trends in production, spending and income continue.

There had seemed to be an opposition from the Government regarding Interest Rates, but as all markets eventually configure themselves I guess Japan realized too that markets just work.

Carry Traders Beware!

The famous Carry Trade [a neat mechanism for instant profits by borrowing money from low interest rate economies (namely Japan who held a Zero-Interest-Rate-Policy till last year) and investing the funds in stronger economies with higher yields (England, US)] may further come under fire as the rate margin is dwindling.

The United States has held its rates steady for almost 6 months now as economies such as the Euro Zone, Japan, England and Australia have been tightening.

Interest Rates tighten and loosen the money supply by demanding more or less interest on borrowed funds from the Central Banks. We seem to be in a secular bull market for interest rates as liquidity is rampant and easy credit has been flowing for decades now.

Even in the likely event of a recession in the short-term, as far as the long term is concerned banks and lenders alike will need to start cutting down on the liquidity they have for years been dumping into the open markets.

This inevitable “inflation” is yet to be seen on a consumer product level, but as many homeowners who bought on sub-prime loans and exotic mortgages are now finding out that Money – contrary to the current popular belief – does not grow on trees.

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