July 5, 2007 (LPAC)--New Zealand has taken over from Iceland as the hotspot for the yen carry trade, because of its 8 per cent central bank interest rate, the highest of any AAA credit-rated nation. Borrowers of the Japanese Yen at 0.5 per cent have stormed into NZ, and driven up the kiwi dollar by 30 per cent against the US$, and 38% against the Yen, in just one year. The kiwi dollar is now at an all-time high, since it was first floated in 1985.

Under its free market policies, NZ is in a catch-22: its interest rate is high, because of its massive current account deficit, which a year ago was 9 per cent of GDP (compared to America's and Australia's also massive 7 per cent). With the inflow of Yen, its deficit has since blown out to 10 per cent. Twice in the last month, a desperate NZ Reserve Bank has intervened in the currency market to sell down the dollar, but the speculators know its capacity is limited. Stephen Koukoulas, of TD Securities, said, "It's like a red rag to a kiwi bull. When the dust settles from this kerfuffle [central bank intervention-Ed.], interest rates are still going to be high and growth solid," he said. London's FT observed that such interventions won't make any difference, and small economies like NZ "just have to go where the markets take them".

Money Week on June 15 reported that while officially the Yen carry trade is US$500 billion worldwide, the OECD estimated leveraged positions on the trade at $4 trillion. A sharp rise in the Yen (caused by its continued rate rises) will have a ripple effect across the world, similar to the violent reversal of the carry trade in 1998.