Devotees of the Bank of Japan
(for MediaCorp 938LIVE’s Money Talks on 19 July 2007)
It was reported last week that Madam Lim Ah Hiang, who
runs a hawker stall in Bedok selling fish soup, raised her
price by 10%, from $3.00 to $3.30 a bowl. The rising costs of
raw materials gave her no choice.
If Madam Lim were in the African country of Zimbabwe,
rising costs would force her to raise the price by 300% every
That is because the official inflation rate in Zimbabwe is
3,700% a year. So a bowl of fish soup should rise from $3.00 to
$9.00 in the first month. Twelve months later, it would be more
than $100.00 a bowl.
This is Zimbabwe today, with its acute shortages and high
But it hasn’t always been like this. As recently as
1997, the Zimbabwean economy was an African success story.
Things took a nose dive from year 2000 after a disastrous land
reform, and the evaporation of international aid.
With no money to pay salaries, Zimbabwe’s central bank
resorted to printing money as a stop-gap measure. But it soon
became the main solution, leading to hyperinflation
In recent years, major central banks have also been
printing money through their low interest rate policies. They
were responding to the dot com bust in year 2000 and the World
Trade Centre attack in 2001. While the global economies have
revived, global asset inflation is now an issue.
Realising the harm, central banks reversed their
policies recently. The exception is the Bank of Japan or BoJ.
The yen's interest rate remains at a very low 0.5%.
At such a low interest rate, global investors find it
profitable to borrow the yen to invest in higher-yielding
assets. This is the “yen carry” trade. No one really knows how
large it is. It could be in the billions or trillions of
It is this huge size that is a potential flash point for
global markets. The day BoJ starts to raise interest rates
continuously will be the day yen borrowers rush to repay their
loans. But first, there will be a massive selling of assets.
Such a global financial storm, which could be worse than the
Asian financial crisis, has been predicted by doomsayers.
The puzzling question is why BoJ officials do not realize
that they are pushing the world closer to this storm? From
BoJ’s viewpoint, their policy is right because, firstly, a weak
yen is good for Japanese exports. And secondly, they believe
their policy requires more time to revive the domestic
Many have tried, unsuccessfully, to persuade BoJ and
its devotees to do otherwise. We must remember that in economic
policies, there is no black and white. Just as in any religious
belief, economic devotees can be blinded by their own
If and when BoJ devotees finally realize that their beliefs
are based on a fake relic, rotten eggs will land on many faces.
BoJ will then have to raise interest rates.
One of two things can happen. The doomsayers could be wrong.
The yen’s impact on global inflation and liquidity could have
been grossly overestimated. In that case, a global financial
storm will not take place.
If the doomsayers are right, the storm will break out.
In the end, if Madam Lim wants to retain her customers, she
would have no choice but to cut the price of her fish soup to
less than $3.00 a bowl.