After reading my last post regarding the yield curve of the US treasuries, a friend asked if those curves replicate those seen during the Japanese Lost Decade.
The Japanese economy has been to where the US economy currently is. Arguably, Japan has not been out of it ever since the 1990s. Zero interest rate policy, or ZIRP, was popularized by Japan first. Because of this, a professor of mine quipped that “if anything, the Japanese central bank is more sophisticated than the Federal Reserve.”
So, how did the Japanese yield curves of the 1990s look like?
The year 1990 and 1991 were undoubtedly inverted, either reflecting or signaling something ominous was about to happen. This was after the Japanese property bubble. It burst and brought with it, the famed Lost Decade.
After those two years, the yield curve assumed some normality albeit some inversion in some years for some term in 1993 and 1995.
(Some of the curves do look too flat and that is because some numbers are missing from the Bloomberg terminal. I took the liberty of imputing average of the nearest readings to make the graph looks pretty.)
The curve continued to flatten over the years into the next decade. By 1996, Japan was very much running ZIRP.
The flattening of the Japanese government bond yield curve, or really the general shrinking of the curve to the point seen in the late 1990s offers a starkly pessimistic reading of the fate of the US economy.
Nevertheless, it is a kind of fatalism to assume that is the ultimate fate of the US economy. Right now, the yield curve in the US is still steep, although it is flattening (notwithstanding the talks of “Operation Twist”).
