First, most of the posts here reflect the general consensus tht the rate discprepancy makes no sense…that’s been the impetus of the “carry trade” where you borrow in Yen at a low interest rate and invest in T-Bills at a higher rate…it’s like printing money as long as the currencies don’t move against you.
In response, thought to the idea that this is insane, and at the risk of getting overly technical, investment banking models are currently viewing the yen as the most undervalued of all currencies worldwide. If you believe that to be true, you stand a big risk that the yen value that you have to repay is much higher than what you borrowed, which would mitigate your gain.
Simple example…Lets say you borrow 100 U.S. dollars in yen at a 130yen/$ exchange rate (you borrowed 13,000 yen). The interest rate on your loan is 1%. You then took that $100 and invested in T-Bills at 5%. In a years time, you have $105. Now it’s time to repay your loan. If all goes well, and the currencies don’t move, you made $4 ($5 interest made, $1 in interest paid). But, lets say the yen appreciates 10% to 117. You then have to repay 13,000/117 = $111 plus a little over a dollar in interest = $112. So, you just lost $7 ($112-$105) instead of making $4.
Don’t assume the market is being irrational just because it seems so on the surface. There are a lot of folks out there taking big, big risks, but making $100 a day for 2 years is nothing when you lose $1,000,000 in a day due to a big move in the currency (read fooled by randomness if you want to learn more).
