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Japan Officially Gets Leapfrogged by the Four Asian Tigers

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Japan Officially Gets Leapfrogged by the Four Asian Tigers

Japan Officially Gets Leapfrogged by the Four Asian Tigers

Throughout the decades in the 1950s and 1960s, the Japanese economy was envied for its unrelenting growth.

Dubbed the “Post-War Miracle”, this period of time saw Japan become a global center of manufacturing and exports. Japanese brands such as Toyota, Sony, Honda, Mitsubishi, Panasonic, and Canon would become household names worldwide. By the 1960s, Japan catapulted to become the second largest economy in the world.

Today, Japan has the third largest economy in terms of total nominal GDP, and the fourth largest by GDP adjusted for Purchasing Power Parity (PPP). This doesn’t seem so bad on paper, but Japan also has nearly 130 million people.

What do those amounts look like per capita? It turns out to be not so good.

After over two decades of economic stagnation, the most recent GDP per capita (PPP) numbers for 2014 by the IMF had the Japanese economy in 29th place globally. As you saw in the opening chart, even more recent projections from another source show that all four Asian Tigers have now all officially leapfrogged Japan in terms of GDP per capita (PPP).

The “Four Asian Tigers”, a term used to reference the highly free-market and developed economies of Hong Kong, Singapore, South Korea, and Taiwan, have continued to grow despite Japan’s struggles. Singapore, a significant Asian banking center, passed Japan in GDP per capita (PPP) back in 1979. Hong Kong would be the next to do so in 1993, and Taiwan would jump ahead during the Financial Crisis. The last of the leapfrogging happened when South Korea passed Japan this year.

This shouldn’t be too surprising, as the struggles of Japan over the last 25 years have been well-documented. However, a point of interest may be the context of how these challenges began.

In the mid-80s, the yen had basically doubled in value against the dollar. For a manufacturing and exporting nation (similar to how China is today), this was less than ideal. While this was happening, the Bank of Japan intervened with five sessions of monetary easing starting in January 1986 to weaken the yen, cutting interest rates from 5.0% to 2.5% in just one year.

During this time, monetary growth was much quicker than anticipated. More-than-sufficient liquidity and ultra low interest rates fueled speculation, which helped lead to inflate a classic asset bubble. In the early 90s, the BOJ hiked rates to counter speculation and curb inflation.

The asset bubble popped, and Japan’s economy would be sent into the “Lost Decade” – a “decade” which has lasted 25 years.

Japan, past 50 years of growth

You can see the drastic increase in money supply leading up to the crisis here:

Japan now has the world’s highest debt-to-GDP ratio of 243% as well as the world’s highest debt-to-revenue ratio.

Despite this, they’ve started an even more potentially dangerous experiment known as Abenomics, which is the three-headed beast of unprecedented quantitative easing, monetary stimulus, and reforms.

Original graphics by: Utopia – You’re Standing In It (blog), Trading Economics

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What History Reveals About Interest Rate Cuts

How have previous cycles of interest rate cuts in the U.S. impacted the economy and financial markets?

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Line chart showing the depth and duration of previous cycles of interest rate cuts.

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The following content is sponsored by New York Life Investments

What History Reveals About Interest Rate Cuts

The Federal Reserve has overseen seven cycles of interest rate cuts, averaging 26 months and 6.35 percentage points (ppts) each.

We’ve partnered with New York Life Investments to examine the impact of interest rate cut cycles on the economy and on the performance of financial assets in the U.S. to help keep investors informed. 

A Brief History of Interest Rate Cuts

Interest rates are a powerful tool that the central bank can use to spur economic activity. 

Typically, when the economy experiences a slowdown or a recession, the Federal Reserve will respond by cutting interest rates. As a result, each of the previous seven rate cut cycles—shown in the table below—occurred during or around U.S. recessions, according to data from the Federal Reserve. 

Interest Rate Cut CycleMagnitude (ppts)
July 2019–April 2020-2.4
July 2007–December 2008-5.1
November 2000–July 2003-5.5
May 1989–December 1992-6.9
August 1984–October 1986-5.8
July 1981–February 1983-10.5
July 1974–January 1977-8.3
Average-6.4

Source: Federal Reserve 07/03/2024

Understanding past economic and financial impacts of interest rate cuts can help investors prepare for future monetary policy changes.

The Economic Response: Inflation

During past cycles, data from the Federal Reserve, shows that, on average, the inflation rate continued to decline throughout (-3.4 percentage points), largely due to the lagged effects of a slower economy that normally precedes interest rate declines. 

CycleStart to end change (ppts)End to one year later (ppts)
July 2019–April 2020-1.5+3.8
July 2007–December 2008-2.3+2.6
November 2000–July 2003-1.3+0.9
May 1989–December 1992-2.5-0.2
August 1984–October 1986-2.8+3.1
July 1981–February 1983-7.3+1.1
July 1974–January 1977-6.3+1.6
Average-3.4+1.9

Source: Federal Reserve 07/03/2024. Based on the effective federal funds rate. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992, 1984-1986, 1981-1983, 1974-1977).

However, inflation played catch-up and rose by +1.9 percentage points one year after the final rate cut. With lower interest rates, consumers were incentivized to spend more and save less, which led to an uptick in the price of goods and services in six of the past seven cycles. 

The Economic Response: Real Consumer Spending Growth

Real consumer spending growth, as measured by the Bureau of Economic Analysis, typically reacted to rate cuts more quickly. 

On average, consumption growth rose slightly during the rate cut periods (+0.3 percentage points) and that increase accelerated one year later (+1.7 percentage points). 

CycleStart to end (ppts)End to one year later (ppts)
July 2019–April 2020-9.6+15.3
July 2007–December 2008-4.6+3.1
November 2000–July 2003+0.8-2.5
May 1989–December 1992+3.0-1.3
August 1984–October 1986+1.6-2.7
July 1981–February 1983+7.2-0.7
July 1974–January 1977+3.9+0.9
Average+0.3+1.7

Source: BEA 07/03/2024. Quarterly data. Consumer spending growth is based on the percent change from the preceding quarter in real personal consumption expenditures, seasonally adjusted at annual rates. Percent changes at annual rates were then used to calculate the change in growth over rate cut cycles. Data from the last full quarter before the date in question was used for calculations. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992, 1984-1986, 1981-1983, 1974-1977).

The COVID-19 pandemic and the Global Financial Crisis were outliers. Spending continued to fall during the rate cut cycles but picked up one year later.

The Investment Response: Stocks, Bonds, and Real Estate

Historically, the trend in financial asset performance differed between stocks, bonds, and real estate both during and after interest rate declines.

Stocks and real estate posted negative returns during the cutting phases, with stocks taking the bigger hit. Conversely, bonds, a traditional safe haven, gained ground. 

AssetDuring (%)1 Quarter After (%)2 Quarters After (%)4 Quarters After (%)
Stocks-6.0+18.2+19.4+23.9
Bonds+6.3+15.3+15.1+10.9
Real Estate-4.8+25.5+15.6+25.5

Source: Yahoo Finance, Federal Reserve, NAREIT 09/04/2024. The S&P 500 total return index was used to track performance of stocks. The ICE Corporate Bonds total return index was used to track the performance of bonds. The NAREIT All Equity REITs total return index was used to track the performance of real estate. Calculations are based on the previous four rate cut cycles (2019-2020, 2007-2008, 2000-2003, 1989-1992). It is not possible to invest directly in an index. Past performance is not indicative of future results. Index definitions can be found at the end of this piece.

However, in the quarters preceding the last rate cut, all three assets increased in value. One year later, real estate had the highest average performance, followed closely by stocks, with bonds coming in third.

What’s Next for Interest Rates

In March 2024, the Federal Reserve released its Summary of Economic Projections outlining its expectation that U.S. interest rates will fall steadily in 2024 and beyond.

YearRange (%)Median (%)
Current5.25-5.505.375
20244.50-4.754.625
20253.75-4.03.875
20263.00-3.253.125
Longer run2.50-2.752.625

Source: Federal Reserve 20/03/2024

Though the timing of interest rate cuts is uncertain, being armed with the knowledge of their impact on the economy and financial markets can provide valuable insight to investors. 

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