Japanese rate rise will flatten the world economy

Only three days ago it was a ‘dead cert’ that the Bank of Japan would raise its rates from an effective zero on the 14th July. Now, however, it all seems uncertain again.

Yesterday Japan’s Economy minister, Kaoru Yosano appeared to back the rise, but the finance minister Sadakazu Tanigaki stressed that the bank should hold the rates at their current value.

There is a concern in Japan that any increase in the rates, even a slight increase, will raise further the spectre of deflation in the economy. The Japanese market in general is only just recovering from deflation in the millennium and a serious long-term recession, which kicked off in the 1990’s.

Furthermore, it is expected that an increase in Japanese rates may trigger higher lending costs on a global basis. The markets are very much reliant on sources of cheap money and Japan has been the place to get it for the last five years.

Without a source of cheap money the markets will tighten and the consequences will be a drop in markets as growth comes to a stop and an increase in rates in other countries as they try to re-balance the currencies across the globe.

Increases in rates are a much needed antidote to the excessive spending in the West and massive growth in China at the moment – casualties are likely to be investors seeing their stocks decrease in value as growth slows to a halt and house owners having to stump up more cash for higher borrowing.

The double whammy may be enough to bring the global economy to a halt, but then again somehow many have been predicting this each year for the last four or five years.