Could the U.S. and Japanese central banks be in cahoots? Many economists don't think so, but 24 hours of coincidences has sparked anew conspiratorial speculation that the two banks will coordinate an interest-rate increase.
Bank of Japan
Gov. Yasuo Matsushita told a Japanese newspaper that he is studying the benefits--and the costs--of maintaining the world's lowest rates. Later on the same day in the United States, a bow-tied
Chairman Alan Greenspan wondered aloud if the stock market was displaying "irrational exuberance." Both comments read like rate-hike warnings to financial markets. Japanese stocks fell 3% and the U.S. stock market opened sharply lower Friday morning before recovering about half its losses.
Economists have wondered about a coordinated rate increase for some time, primarily because Japan's fragile export-oriented economy would not respond well if the yen suddenly strengthened. When central banks hike rates, their nation's currency tends to become relatively more attractive. A coordinated rate hike would make such a scenario less likely.
Still, many economists dismissed the grassy-knoll talk, saying the combination of comments reflected more serendipity than strategy.
"People love to talk about coordination," says Dan Seto, an economist at
in New York. "This is a wonderful story that often crops up."
But Seto sees coordination as no more than a fairy tale, at least right now. Japan's recovery from a five-year downturn remains too fragile to tolerate a rate hike, and, he adds, U.S. policy makers have no reason to raise rates since inflation appears under control.
Despite Seto's protestations, Japan's record low discount rate of 0.5% (called "free money" by some Wall Streeters) has only fed speculation about an impending rate increase.
Why does it matter? Higher rates in Japan could put an end to the lucrative yen-carry trade, in which investors borrow yen and invest in dollar-denominated securities--like Treasuries--that offer better yields than can be found in Tokyo. Expectation of higher rates in Japan could prompt investors to unwind those trades, rushing to pay back their yen debt before interest rates rise.
Still, economists see no reason for those leveraged investors to fret.
"I can't think of any reasons for rate increases anywhere in the G-7," said Carol Stone, senior economist at
in New York. "I don't think there's a coordinated effort going on here."
By Andrew Morse