If I wanted to borrow money, why wouldn't I just borrow from Japanese banks? Their rates have been near zero p

Question

ercent for a long time! Why would I waste my time and pay 5 or 6 percent in the US? Am I, a consumer, stupid?

I have a credit card right now that is 0% finance from a Japanese bank. Why wouldn't I have access? What is the risk? You mean if interest rates dropped below 0%? lol You have got to be kidding, right?

AARP credit card

Answer 1

Millions of Japanese citizens and hedge funds are doing the same thing that you are doing. It's called the "carry trade," and it works great until it doesn't.

The risk is that you have to pay back more dollars in the future than you borrowed.

Let's say you borrowed $1200 at JPY120/$1. This means you borrowed JPY144,000. So far so good. However, lets say next year the rate goes to JPY100/$1. This means that now you have to find $1440 to pay back the amount you borrowed. While you are paying 0% "interest", your debt grew by 20%, just from currency appreciation. Even if you were investing the funds at 5% or so, you are still 15% in the hole.

That's the risk.

Answer 2

Taranto is spot on. What you are proposing is what's been happening with the Yen carry trade, ie, people borrowed in Japan and 0% and invested in countries where interest rates where higher.

But, in order for that to remain profitable, 2 things must occur:

1) Interest rate differentials must maintain a significant gap. The BoJ has set rates at 0.75%, while here in the U.S. the Fed Funds rate is 5.25%, so that isn't a concern -- YET.

2) The Yen must remain weak against the dollar. Well, the Yen has significantly strengthened against the dollar recently, from 123.85 to 113.40, so anyone that has borrowed Yen is now losing money as the Yen has strengthened.

Unless you can gauge what the strength of the USD/JPY is going to be, you're playing a dangerous game.

Answer 3

Do you have access to that market?

Are you including the risk due to foreign exchange rates?