Why Japanese Monetary Policy Will Drive Global Mortgage Rates Lower

Japan, for the last 6 months or so, has embarked on an unprecedented economic experiment. Much like the US with their quantitative easing program, Japan has implemented its own but on a grander scale vowing to print as much money as needed to bring inflation back to Japan after a two-decade-long period of deflation. The Japanese government objective is to devalue its currency to make Japanese exports more affordable thereby increasing demand for them and stimulating the economy. This has resulted in a massive stock market rally in Japan and for the time being is being revered.

The unintended consequence is the exacerbation of the carry trade. The carry is trade is where institutional investors borrow money from Japan and pay the extremely low interest rates (Japan has had some of the worlds lowest interest rates for years) and invest them elsewhere such as US treasuries fetching a higher interest rate profiting on the spread. With the knowledge that Japan is intentionally devaluating its currency, investors will profit further by eventually paying back the borrowed money with inflated foreign currency (deflated yen). The yen has already devalued over 25% versus the US in the last 6 months alone. This huge outflow of capital from Japan into foreign markets such as the US is driving up demand for US government bonds ramping up bond prices and inversely bringing yields down further to new historical lows. Since mortgage rates are determined by government bond rates, there is a high probability we will see further declines in mortgage rates.

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