Yen carry trade and New Zealand's economic prospects

Claus Vistesen at Alpha Sources notes today that the most recent inflation numbers for New Zealand

"beat the central bank's expectations. It is of course still too late to say anything but with today's inflation data the markets are gearing up for the RBNZ to raise the refi rate to an unprecedented 8.25% next week. In doing so the bank will clearly be playing into the hands of all those savvy retail investors and indeed institutional players playing the carry trade which is driven by very high global capital mobility and high interest rate differentials between central banks."

It seems to me that the prospect of the currency of one of the world's largest and most populous economies(Japan) being dumped for the currency of one of the world's smaller and more isolated economies is somewhat Kafka-esque.

A quick review of the Wikipedia entry on New Zealand shows NZ to be "a country heavily dependent on trade, particularly in agricultural products, and exports almost 28% of its output." Thus, the current carry trade situation looks to be particularly damaging to NZ's economic prospects.

As far as long term solutions for New Zealand go, the Wikipedia authors state that "the current government's economic objectives are centred on pursuing free-trade agreements and building a "knowledge economy". In 2004, the government began discussing a free trade agreement with the People's Republic of China, one of the first countries to do so. Ongoing economic challenges for New Zealand include a current account deficit of 9% of GDP[19], slow development of non-commodity exports and tepid growth of labour productivity. New Zealand has experienced a series of "brain drains" since the 1970s[20] as well educated youth left permanently for Australia, Britain or the United States." With a population of only 4.2 million and a below-replacement total fertility rate of 1.79, it seems to me that New Zealand likely lacks the human capital to generate sustained economic growth. Given the country's geographic remoteness, it seems unlikely to attract skilled immigrants in any meaningful numbers.

It seems that New Zealand's situation today is analogous to the Eastern European countries being discussed over at Demography Matters.