Japan's Dire Message To Yellen: "Don't Raise Rates Soon"

Tyler Durden's picture

Originally posted at KesslerCompanies.com,

We think it is more useful to compare economics and interest rates in

  • the period since 2007 in the U.S. (The Great Recession) with
  • the period since 1990 in Japan (Japan’s 2+ lost decades) as well as
  • the period after 1929 in the US (The Great Depression)

...because they are all periods of a ‘balance-sheet recession’ (or similarly, ‘secular stagnation’).

Many commentators and policy makers don’t fully appreciate or acknowledge this distinction from the more frequent ‘inventory-cycle’ type recessions.

There are so many parallels between these three that it is next to impossible to dismiss the comparison. (note: for a previous writing of ours on this topic, click here) Using this, there is an important lesson for the Fed to consider now in weighing whether to raise rates.

In the two charts below, we’ve offset US interest rates to Japan’s interest rates by 16 years to roughly align the major peaks in their respective main stock markets. The charts each cover a 27 year period. Other than the US lowering rates quicker than in Japan (Ben Bernanke’s main legacy), and Japan’s term rates starting the cycle in the 8%+ range, these charts are quite similar; interest rates steadily grind lower over a long period of time.

Soon after the ‘NOW’ line in the comparison below, Japan raised rates one time in August 2000 (top chart) from 0.0% to 0.25%, yet almost immediately, term interest rates crashed as the economy faltered. Within 7 months, the Bank of Japan had to lower short-term rates back to 0.15% in February 2001 (note: the US interest rate target is already at 0.125%, not 0%). As US short-term interest rate expectations are priced now (dotted blue line in lower chart), the market expects a continuous Fed raising cycle to about 3% in 2024. We continue to think that the Fed Funds rate will be forced to stay much lower than that over the next 10 years, and all rates across the yield curve will need to drop to reflect that.

But there is a more specific issue that the Federal Open Market Committee (FOMC) faces at their next few meetings. The FOMC have, for a very long time, predictably moved their policy levers in opposition to the state of macroeconomics. In taking a survey of economics now, the US economy could easily warrant a further easing of policy. Wage stagnation, output gap slack, global recession-level commodity prices, sub-target inflation, China’s slowdown in its early stages, the rest of the world’s central banks in an easing mode, and US production indicators showing weakness are each, by themselves, a good reason not to raise rates. 

Yet, part of the FOMC is contemplating a ‘philosophical’ rate rise this year simply because the Fed funds rate has been near 0% for close to 7 years, and it somehow seems reckless to them to leave the rate low indefinitely.

Our suggestion to the FOMC as we approach these dates is to be extra careful, look at the historical comparisons, and don’t underestimate the trust the markets have for the FOMC to act rationally. We all expect the FOMC to act counter-cyclically; a rate rise now would be pro-cyclical, or making the problem worse. Anything FOMC members say after a ‘philosophical’ rate rise would greatly diminish its value. This comparison with Japan suggests that raising rates prematurely is detrimental and avoidable.


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JustObserving's picture

Nothing can save Japan.  Their currency loses more in a week than you can make in a year or two holding their bonds.  

Only the exceedingly suicidal hold Japanese bonds. 

CheapBastard's picture

The yen is so cheap now I read the Chinese tourists have flooded their country. I hear there is some hard feelings between the two but most hotel and store owners swallow their pride to survive. They can thank their leaders for making them kow tow to people they inherently are not too fond of.


I feel sorrow for the average Japanese there. Clean, great food, friendly and zero crime .... Their leaders -- polirticans and corporate heads -- screwed them royally.


And on top of it, they are saturated with radiation; what a friggin mess!

BringOnTheAsteroid's picture

Tokyo soil would be considered toxic waste in the US


May turn out to be one of the greatest crsises in history. Maybe we still don't know the long term effects on humans at the doses found in Tokyo.

Maybe we will find out in the not distant future. 


Xanthias's picture

"There is some hard feelings" indeed.  Do you have any clue about Asian history or culture?  The consistent Japanese denial of their abuse of neighboring countries?  Where you coming from?

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) CheapBastard Aug 6, 2015 7:40 AM

True, I stayed two weeks at the Ritz Carlton in Osaka recently .To many rude stupid Chinese there the Japanese do not like them for a good reason.

Luckhasit's picture

The BOJ back stopped by the Fed with Japanese citizenry (corps, hedgies, rare individual) are the pretty much the only ones buying those bonds.  That duck is dead in the water and has been for awhile.

ArkansasAngie's picture

You just gotta let bankruptcies happen.  Insolvent is insolvent.  Recognizing an asset true economic value is a good thing.

Sages wife's picture

That might depend on your perspective. Just ask Jamie Dimon.

ramacers's picture

get on the american tit, get what you deserve.

CHC's picture
CHC (not verified) Aug 5, 2015 8:13 PM

OK - just because you asked her politely, she won't raise rates in September. 

Aussiekiwi's picture

There may be a miniscule rate rise in September, just so they can say 'see! we raised rates like we said, everything is back on track' IF it occurs it will be the first and last for a long long long time.

VegasBob's picture

I don't believe there will be any significant rate hike in my lifetime, and I'm 63.

I seriously doubt the Fed will hike at all this year.

If they do, I think it will be a cosmetic one and done reset to 0.25%.

The people on the FOMC know that raising rates will provide the pinprick to pop their carefully engineered asset bubbles - stocks, bonds, housing.

It is only the asset bubbles that make the moribund US economy look good.

crusty curmudgeon's picture

The smart move would be to raise rates.  Which makes me think you're probably right.

silverer's picture

It goes like this:  I have a baseball bat.  I'm going to swing it as hard as I can and hit you in the arm.  Raise rates: left arm.  Don't raise rates, right arm.

Ghostdog's picture

Completely Agree.. Felon only raises it 25/50bps to get ahead of the onslaught so she has something to cut before QE4/QE5 is in order. Though there is one thing that is indeed possible. That she loses control of the interest rate market. Then, there is no amount of QE that will do anything to stop the implosion of 314T of bond fleeing. QE will be like a drop of precum in a 100 particpant BJ Fest

Yen Cross's picture

  The BoJ is shitting briCks. (literally)

   I see how this farce ends, and it isn't a slow "melt down".

 I  listen to traders that are under 40 to guage insight.

 Tyler, one of your most prophetic remarks is 100% true.

  Where's a trader that's EVER seen rates over ZIRP?  I thought these kids were retards, and then realized my mortality. :-D

 They're(their) ignorance is MY gain.

  The show is entering it's final act.

kiwigal's picture

When they raise interest rates in September expect a stock market tantrum. Interestingly there is a book out there saying September crash.

JamesBond's picture

Then the proper financial move here in the states would be to short the yen.



buzzsaw99's picture

nothing moar pathetic than a "bond specialist" who doesn't understand that the fed raising the ffr is actually bullish for treasurys. oh, don't take away the sugar tits it might be bad for bonds. wawawawa

Son of Loki's picture

Yellen and Barry are so clueless it ain't funny. Many sectors are tumbling into serious depression (retail, O&G, for ex) and the fact she even mentions rate raising is a sign Barry, the Dems and the Fed are out to lunch and all need to be replaced ASAP.


As Trump says, Obamacare still needs to be repealed and American jobs need to be created instead of screwing around overseas and/or handing Trillions to foreign gubmints.


The Bernank spoke the truth one time in his life and that's when he resigned from the Fed and said, "interest rates will not rise in his lifetime."

Latitude25's picture

Must be frustrating to be a central banker.   hehe  All they can try is bullshit guidance and watch the slow grind downwards.

stewie's picture

.. and collect millions in the process for themselves.  Very frustrating indeed. NEVER, EVER assume the narrative is in line with intentions.  This is a high stake game and the power to create billion $s/mth has a goal.  Making money means nothing when it's free for you.  It's just a tool, a very powerfull one but nevertheles just a tool.

Latitude25's picture

True in the short term.  In the long term the marginal utility of legalized theft goes to zero.

wow thats crazy's picture

They are only going to raise rate so they can lower them again to make it look like they are doing something! When shit starts turning down.

fed_depression's picture

Why doesn't anyone know USA is Japan? Buy UST's there's no risk thanks to other central banks more desparate and you'll make a fortune as rates crater. All you need is a small gold or other forex hedge.

Colonel Klink's picture

The feral Federal Reserve white haired Yoda isn't going to raise rates.  They've back themselves in the corner and they're about to be BF'd by the market at some point.

Raise rate, kill the eCONomy and blow up the Federal budgets.

Good luck with that Mr. Felon!

Bluntly Put's picture

They can't raise rates, for every time they 1/2ed the prime rate they doubled the burden of debt should they ever try to normalize them again.

Fekete nailed this loooong ago

In this article I shall argue that there is no trade-off between growth and debt under the regime of the irredeemable dollar lacking, as it does, an ultimate extinguisher of debt. Once new debt is piled on the top of the old, total debt is increased that will never be reduced, and will become perpetual debt. As protagonists of the stimulus package well know, retirement of the debt of the federal government is tantamount to deliberate deflation, that is, contraction in the money supply, by reducing the pool of bonds available for monetization.


What will be scary is the crash that happens when investors finally lose confidence in the put, that is kaput.


artichoke's picture

That article says that as interest rates drop, high interest debt becomes too burdensome to maintain.  That's true.

What he doesn't mention is that debt can be refinanced to current rates, often without even a penalty.  Borrow at current rates, pay off the old contract in full.  And even if some of that stuff was not prepayable, it's been 7 years since 2008 and most of it has expired by now.  There is almost no high interest debt (except for credit spreads) in existence any more to cause further problems.

I've read other good stuff by Fekete, but I think this observation from Finance 101 upends his whole argument.

tok1's picture

The deflation seems to be caused by too much capital having to allocated to worthless Govt debt.. ie the FED holds about 2.5trill in tres (4.5 trill total but 2.5 tres) that leaves about 16 trill for the market. ie 16 trill of capital that has to be allocated to Govt debt that produces nothing and interest payments that increase the US tax burden.

Any debt reduction could simply involve a large one off QE type redemption, ie FED swaps say 5 trill USD worth of tres for cash. ie so the bond holders now have cash and it can then be left with the FED or invested in private sector,

This would reduce the interest burden of the Govt and stimulate the private sector.

ie people seem to have forgotton one of the problems with large Govt debt is it crouds out the private sector, ie if its not there investors have to look to private sector (small business/ housing / corporate debt) for income.

The FED could then raise rates to squeese out some bad investments. without fear of Govt debt cost explosion.


The rate rise would also slow the inflationary impact from the sudden increase in USD supply to private sector.


Saying using monetary expansion to reduce Govt debt is debt destruction is  just a ploy by Govt because they would be expected to balance budget after the adjustment.


They dont want that they want to keep the system where   most funds flow to them and they keep spending/crouding out private sector.


Yen Cross's picture

 A little bait?

 Okay lets discuss the usd/eur trade.

 Personally, I'm flat.

   In order for the euro to be a "carry trade", it would require "NET" euro selling.

 I'm NOT seeing that YET. Look at the ponzi DAX?

 Yes, I agree the euro could be a carry currency. NAKED (rate yield vs depreciation) I'm probably out in front of most Z/Hers/

 Markets are unwinding $usd carry trades that are hedged. Asia is NOT only exporting inflation, it's also exporting (covering) original lending terms.

 Here's where it gets tricky, and Tyler understands. The cost of money is rising exponentially.

 As inflation gets absorbed, not unlike interest paid on excess reserves.

 BTW> Fuck You Moe Howard. You have zero understanding of the fake money printers of the Faux Paux Republicc (cccp.)of America


Surging Chaos's picture

Does this honestly come as any surprise? Japan is in horrible economic shape. Its debt to GDP ratio is FAR worse than that of Greece, yet it gets zero attention from the media. Japan has only been able to avoid disaster because it has control over its own currency, but ZIRP and money printing only go so far.

It's funny watching the EU try to prop up a country that has a GDP roughly equivalent to the state of Vermont. Who will try to prop up the third largest economy in the world when it goes under?

farmboy's picture

This could well be catch 22 for the FED. Raising rates in this bad macro environment will crash long rates and/or stocks. Not raising rates will harm the banks/insurance/pension plans so has become counter productive like Gross has been saying. Good Luck eggheads at the FED in this great monetary experiment how to get out.

GreatUncle's picture

In history interest at extortionate rates were used to fleece a population and that time is long gone.

The interest rate is now used as an economic tool of central banks to justify debt because even though it may crater the economy the numeric value rises and the central bank then runs round shouting grooth, growth, growth.

Reckon bonds, stocks and housing are at the top of the bubbles now but you still need growth what can you do? Interest rate rises or tax increases then.

What Yellen seems to ignore though is that you cut liquidity of the global reserve currency and now you are going to inflict an interest rate rise on the world not just the USA. That could have serious ramification for the 24 or so nations recently listed and the economic crisis they are going through.

Not so easy ... who will be blamed?

lucky and good's picture

Almost more important than the Fed's interest rate is the value of the dollar in comparison to other currencies. The yen and the euro are in serious trouble, and the pound is very vulnerable to contagion. The path Janet Yellen has continued down is reckless, but what the ECB and BOJ have done borders on criminal. While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known.

It appears the dollar has been in a consolidation period and when the next leg up begins risk will dramatically increase. This could signal the onset of the next global crisis to which 2008 was just the warm-up. More on the problems this will cause in the article below.


gregga777's picture

What a miserable rich fuck. Keep interest rates so over-indebted zombie companies keep limping along. Keep stealing from savers, retirees and pension plans. Anything to save the rich fucks from taking a hit to their obscene levels of plunder.

Hang this rich fuck, already! I'll be so happy to see the rich hanging from street lamps!

gregga777's picture

The "secular" stagnation was CAUSED by artificially low interest rates that encouraged everyone to load up on debt! Now this rich moron wants to keep interest rates at 0% indefinitely, for the RICH only of course? 0% for the rich and 23% for us? Follow the fucking money! Who benefits? The RICH! Hang them all!

gregga777's picture

The Unconstitutional Federal Reserve Bank of the Rich caused all of these problems! Hang every last rich oligarch, the elites, and all of their families! Enact a Constitutional banning a central bank, banning the rich from ever funneling money to control governments and banning human rights for corporations!

gregga777's picture

Just because Greenspan has found "religion" does not let him off the hook for his years as the head of the Federal Richie Rich Reserve Bank. He is directly and individually responsible for the Internet bubble and shares responsibility for Housing Bubble 1.0. Bernanke and Yellen share responsibility for Housing Bubble 2.0. Greenspan still hangs along with Bernanke and that toad Yellen and all of the rest of them on the list.

It's a really, really long list, too!

gregga777's picture

Q: What's as dumb as a box of rocks?
A: An economist.

Q: What's dumber than a box of rocks?
A: An economist with a Ph. D.

Q: What's uglier than a box of rocks?
A: Hillary "Hitlery" Clinton.

Q: What could improve Hitlery's looks?
A: Her head spiked on a pike.