Not Turning Japanese

With all the concern (some might say excessive concern) about impending rate hikes, we thought it might be helpful to review how we arrived at the present interest rate levels. We hope this will provide some insight as to what possible market reactions might be to the impending interest rates increases.

Indeed, notable by its absence was the word “Patience” in Alan Greenspan’s Congressional testimony last week. This leads us to expect that at the Fed meeting in May, they will produce a change in language in their official statement. That leaves them the option of increasing rates a ¼ point at a time, should they need to, at the August meeting.

As such, it may be instructive to compare analogous post bubble periods – 1990 to 2000 for Japan, versus 2000 – present for the U.S. As the nearby chart reveals, the Federal Reserve cut rates faster and more aggressively than the Japanese Central Bankers. Over the course of a year (2001-02), Greenspan & Company cut the discount rate from 6% to 2%. By contrast, the Japanese bankers took almost 4 years (1990-94) to slash rates that low. One year later, the Fed had brought rates down to 1%. That same process took Tokyo an additional 30 months or so.

In comparing the post-bubble experiences of both countries’ economies, the U.S. has enjoyed far more stimulus, and far sooner, than did Japan. This may be attributable to Central Bankers here learning from the mistakes of the Japanese. Additionally, the Keiretsu – the massive, vertically integrated, interconnected conglomerate – does not exist in the U.S. corporate universe. They are a prevailing form of corporate structure in Japan.

We also note that in the U.S., the bubble was primarily concentrated in technology, internet and telecom sectors. While the entire market did get overheated, these sectors had the greatest run ups – and the greatest crashes. Because of the way Japanese corporations are structured, their bubble cut across far more sectors of the economy: Banking, insurance, and real estate took a heavy beating as well technology and telecom.

The net result is that post bubble, the U.S. has enjoyed a much greater level of stimulus than Japan did. That is reflected in the past year’s market run up. Indeed, only now, some 14 years after their bubble popped, are some analysts first getting comfortable with the concept of buying Japan. The risk factor is that post-bubble excesses still exist which, have yet to be wrung out of the economy here. Under normal circumstances, we would not be too concerned with increasing rates. The problem is that these are anything but normal circumstances.

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  1. Mark T commented on Apr 27

    The other enormous difference of course is that the Japanese bubble burst when interest rates were increased dramatically in a highly leveraged economy. The constant mis-reading of this cycle reflects an attempt to impose a typical credit cycle model, when none in fact existed, the tightening phase such as it was was merely undoing the post LTCM emergency cuts. It’s not just that the US cut faster, rates never went up as dramatically in the first place.

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