If the bank in Japan set interest 0.5% and Indonesia have 8%, could we assume all the money flow to Indonesia?

Question

If you have a lot of money and live in Japan, wouldn't you just deposit all your money in Indonesia? Because you profit 7.5%. Wouldn't all the people in Japan?

Enlighten me...

10 pts. for good or detailed answer.

Answer 1

your analysis is good as far as it goes ... AND, suppose the rate of inflation in Japan if 0 and that in Indonesia is 10% per year.

Then you'd expect that the rupiah would fall relative to the yen by 10% in the coming year, and depositing your funds in Indonesia would be a losing move.

***
There are some very large players indeed who borrow millions in Japan, export the yen, and deposit it in some other currency overseas,

The key to playing this interest arbitrage game profitably is to borrow in countries where the return to capital is small [interest minus inflation rate] and invest in countries where the return to capital is larger.

That gives you an edge, a likely positive spread, on the deal.

The underlying risk is that the capital host country may take some domestic political action [such as suddenly impose a 35% income tax where it previously had none, or devalue their currency 'more' than inflation indicates should be needed in order to gain a trade advantage] that will upset your deal and force you to lose money.


does this help?

Answer 2

Wow.....good answer spock......well done!

anyway just to add......A country's currency depends alot on the country's economy. Even if you would earn 7.5% Rupiah on the long run.....if the value of the Rupiah falls....you're basically screwed! As for now the economic sentiment in Indonesia is not looking that bright......they've been trying to recover from the 1997 Asian Economic crisis and still haven't been able to.

Answer 3

Yes. Tons of Japanese are doing currency investment, Forex, today.
More than 1 million accounts for the trade exist in Japan.
Their domestic currency, yen, is low interest. If they invested to other country's currency, they can get the interest easily.
But Indonesian Rupee is not that famous. Japanese are rather investing to US$, Euro, British Bond, Canadian and Australian dollars.