What Happened When Japan Hiked By 25 bps In 2000

Tyler Durden's picture

Last night Japanese politicians acted out what they thought today's FOMC Meeting would look like if one were a fly-on-the-wall...


As they know what happens when the central bank raises rates too soon... (as we detailed a month ago via 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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Tonald J Drump's picture

Ho Li Fuk with the flying elbow strike ! !

Son of Loki's picture

That was a huuuuuuuuuuuuuuuuuge flying elbow strike!

pods's picture

I think that was Beeks.

NoDebt's picture

Did he get that guy off the other guy by pulling on his EAR?

nuubee's picture

As yields approach zero, bonds become currency, at which point QE is little different from a literal printing press shooting money out of a helicopter.


Speaking of which, it might be interesting to see what the interest rates Japan "expected" it would have at the same point in time, I'll bet its the same BS curve

firstdivision's picture

Here's what one can learn from the Japan economic problems.  If you hike, then back out like a little bitch due to a correction in overpriced assets, stick to the hike or you will be doomed to 0% interest forever.

Max Steel's picture

Japs going Kamikaze all over !

Son of Loki's picture

I wish we had more action on our Congressional floor. Maybe beat Reed and Piglosi for starts then work on over to "Do Nothing" Boner and apathetic McConnell.


They'd all look much better with black eyes. I know I'd feel better.

Oldballplayer's picture

Half of them would look better with black eyes, and the other half with bloody knuckles.


Bill of Rights's picture

30 minutes to " bag holding time "

roisaber's picture

WTF is all this about raising rates prematurely? When the dot.com bubble started blowing up, rates should have been raised to 12% and the disease torn out by the root.

jump_mutha_fukah's picture

Back in the day we called it buy the rumor, sell the news(before BTFD er BTFATH took center stage)...Russell 4hr chart RSI flashing overbought...we don't normally sit in that territory for long...RUT been leading this fiasco as of late.

bnbdnb's picture

Doesnt matter what the decision is. The fact of the matter is, those in power know the decision and have planned accordingly for themselves and their friends/family.

Bill of Rights's picture

True fuck'en story, whereas I have to play like I'm gambling at the casino.

q99x2's picture

20 minutes until the witch exhales sulfurous vapor.

RobD's picture

American Airlines grounded nation wide for "Technical Issues" what Tech issues would ground all planes? Something smells.

FranSix's picture

Can't cough up a flight plan.

aliki's picture

if the people are unwillilng to educate themselves on the ramifications of keynsian principals then i have zero remorse for them. goes for the japanese as well as us here in the states. we got what we deserved with obama. he's stuck to his credo to "fundementally change" this country. if the poor can't see they've gotten crushed, if blacks can't see that black unemployment is up 2% since he took office, if seniors can't see they are getting nothing on what they've worked their entire life to save ALL THE WHILE the rich have become ULTRA RICH and that the ONLY way to FIX this is to COMPLETELY reverse course, then i have zero remorse for them if they allow their vote to once again be taken for granted.

lloyd came out and endorsed hillary yesterday and denounced trump. why? because trump will take a reagan/volcker approach & put an end to this shit by going in there with a chainsaw to cut debt & spending SO WE WILL BE IN POSITION to raise rates and THEN AND ONLY THEN people can take control of their own lives. you control the debt, u control everything. goldman & others have made a boatload on debt-backed products the past 7 years. how would the reversal/unwind of that impact their business? hint = not good.

santelli said that in the pits they used to have a patch on their jackets that said "free markets = free men". we need a leader who will free us of this insurmountable debt thats been amassed by obama and bush. john adams once said you can either enslave thru the sword or thur debt. its time to end the central planning that so many have become conditioned that they need in their every day zombie lives.

Crocodile's picture

Your compassion is overwhelming, but sometimes you must accept people for who they think they are.

atomicwasted's picture

I think your post is cogent and thoughtful and a good example of what ZH used to be back in the day.

I would gently suggest that we don't have any idea whether Trump would follow the Carter/Volcker (Volcker was appointed by Carter and started raising rates in the final year of the Carter presidency)/Reagan approach, because he hasn't said anything about it yet.

Jersey_Mountaineer's picture

If raising them after seven years by that little is "premature", it always will be.

ZIRPY's picture

Eggzactly! It's ALWAYS going to be premature as far as the easy money financiers are concerned.

Jersey_Mountaineer's picture

One idiot journalist yesterday said that the Fed was "too early" in 1937.

BeaverCream's picture

hung way low just dropped his eggroll

Bill of Rights's picture

I hope the Pentiums have been upgraded this will be an epic move on both ends of the spectrum.

Crocodile's picture

I thought 7 minutes was premature; I'm pretty sure 7 years is not.

medium giraffe's picture

A shameful display of martial ineptitude.  What Would Tokugawa Do?

Raoul_Luke's picture

They only become "balance sheet" recessions when Keynesian political elites override a series of "inventory cycle" recessions with centrally planned bouts of "stimulus."

And that allows the debt load to become too large for the (real) economy to support.  It's not like it's some randomly occurring "super recession."  It results from policy mistakes enacted to avoid the "normal" recessions.

The only way to fix it is to allow the markets to clear and the bad debt to be written down.  Or you can wait it out until some of the debt gets paid down and the economy (slowly) grows to the point where the debt load is managable.  This "forever" stiimulus is precisely the cause of the "secular stagnation" as eventually the Keynesians run out of future demand that can be pulled into the present.  And then your economy is stuck in neutral until you stop the madness of central planning.

Seasmoke's picture

2 Minute Warning. Until Boom or Bust. Either way. It's insanity !!!! 

RobD's picture

Ten Year seems to think no hike.

Banker Buster's picture

Anyone notice yet that Japan is in bad shape.  Why would we want to imitate them and keep rates near zero like they did?

medium giraffe's picture

Unch. Fucking surprise.

Crocodile's picture

Official - no rate hikes.


None in 2016 and the economy is good "everything is awesome"; they lost credibility all together.


Alogo hit green, but market is trying to tank.  All alogo "on the ready".

ZIRPY's picture

LOL the only chance we'll ever have to see a raise is after the Yen blows up and everyone realizes we're on the same path.

Other than a Yen blow up these clowns are NEVER going to raise.

Crocodile's picture

Markt is tanking

Grandad Grumps's picture

And keeping interest rates at zero has worked so well for Japan.

Maybe the problem is not the rate of interest, but the misallocation of capital. The money is going to the wrong people and places.

Crocodile's picture

Algos are full steam ahead....I hope they fry!!

moneybots's picture

"This comparison with Japan suggests that raising rates prematurely is detrimental and avoidable"


I don't see how it matters.  From 2000 to 2015, Japan hasn't really improved.  It looks just as detrimental if Japan hadn't raised the rate.


TallDave's picture

Based on data from the major monetary areas over recent decades, there seems to be a range of inflation below 2-3% where debt-deflation effects or other phenomenae result in lower growth/employment with large deltas from small movements because the inflection points in policy are so important in this range.  The recent correlation between stock prices and monetary signals is historically unusual -- right now markets see growth in looser money, but that wasn't true (for instance) when the Fed was trying to target employment in the pre-Volcker days,

Eventually CBs will figure out the nominal GDP trend is a better target and adopt something NGDPLT-like, but given that we're still arguing over what caused TGD 80 years later it may take a while.

TallDave's picture

Here's a fun example to think about:

Suppose the CB decided they really, really wanted higher interest rates in the long run.  So they come out and say "Guess what, we're going to do whatever it takes to push inflation to 10% this year!  And every year for the foreseeable future!  We're going to cut all rates to zero or negative AND we're going to buy however many assets it takes!  Fire up the printing pressess! BANZAAAAAAI!!!!"

In the short term, rates fall.  But in the long-term, as investors decide the Fed is serious and start expecting 10% inflation, they start demanding an inflation premium.  And lo, over the years, rates gradually rise to a new equilibrium.

It's essentially the Volcker/Greenspan/Bernanke era in reverse.