July 25, 2007 | posted by Michael Baxter in IABN |

Japan illustrates quite how back to front the world really is.

The economy of the rising sun has suffered years of modest inflation, or even deflation, its trade deficit has been soaring, and yet its currency keeps falling.

The yen is now at its lowest ever level against the euro and 6 per cent down against the dollar.

And while the currency falls, the trade surplus grows. In June the surplus was 53 per cent up on a year ago, hitting 1.23 trillion yen or $10.2 billion, in the month. To put this in perspective, the US trade deficit is around the $60 billion mark, and the UK deficit around £10 billion a month.

It just goes to show that a massive trade surplus does not automatically mean a fall in the value of the currency, not any more.

Even so, a falling yen brings with it inflation worries, and it seems that the chances have increased that the Bank of Japan will soon up rates to 0.75 per cent.

Of course, this will mean the cost of borrowing in Japan is tiny, but as the yen falls, and rates rise, the idea of taking money out of Japan and investing it into the US and UK is looking less attractive. This could mean a collapse in the carry trade, another reason why the global supply of credit could, all of a sudden, dry up.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved