Some Observations About Japan's Zero Interest Rate Policy and the Yen Carry Trade

This thesis discusses the evolution of the Japanese Monetary Policy and its relationship to the Yen carry trade. I track this development from inception. I specifically examine how the central Bank of Japan (BOJ) is proceeding now to withdraw Japan from the zero interest rate policy. Specifically covered are the last two years in which central bank policy changed from quantitative easing to interest rate targeting. I present evidence to show how Japan's zero interest rate policy and the evolution of Yen carry trade activity coincided with a reduction in risk premiums throughout the world. I also show how the withdrawal of the Yen carry trade had a temporary impact on those risk premiums in May and June of 2006 and January and February of 2007. Estimates of the size of financial markets impacts are included.