The Operations "carry trade" Part-3

This trend leads to a significant increase in financial markets, coupled with a loss of the concept of risk in the minds of market players due to a depletion of non cash flow. However, a decline in performance in the financial markets, a sudden reversal of the markets, would cause substantial losses for investors, given the high level of leverage and risk now supported in the carry trade. Such a situation would cause a repositioning of investors and a concomitant rapid unwinding of positions in many currencies.

The decrease in the level of liquidity resulting from this movement would affect all markets and could be the detonator of a currency crisis or a global economic crisis in the world.

The same situation was experienced in 1997-1998 in Asia, while the yen carry trade operations were already in place and that the Russian market, to be distributed, had fallen sharply. Today the extent of yen carry trade is more important and the crisis would reach Europe and the United States, countries in which investments are made.

In a context of continued increase in European markets and U.S. growth of risk borne by financial transactions recently implemented, Japanese monetary policy is closely watched by central banks. To prevent slippage of financial markets, a gradual closing of the "tap" cash is needed and must go through a rate hike. However, the continued movement deflation in Japan does not justify a significant rise in interest rates. Japan cannot afford to hire a real policy of monetary tightening; the Bank of Japan announced Feb. 21 an increase in the rate of 0.25% and should not go much further in the short term.

Several questions arise: what are today the real levers available to the Bank of Japan? Central banks have they yet have the means to weigh on global liquidity? Is it too late to avoid the worst?