Market Insight
April 6, 2017
‘The 6th jinx’ – The ECB holds the key once again
Hajime Takata, Chief Economist
Having worked in the global financial markets for close on 40 years, the author has for the past 10 years or
more focused on the alignment of policy interest rate hikes in Japan, the US, and Europe. This is referred to as
the ‘five jinxes’, as outlined in the chart below. There has been increased alignment in the financial markets,
particularly in Japan, the US and Europe, since the move to a floating exchange rate regime in the 1970s. Five
common phenomena have been evident in the markets within the pattern of policy interest rate hikes in Japan,
the US, and Europe. The synchronization since the 1970s that has facilitated the tendency towards alignment of
worldwide fundamentals has been through policy collaboration of developed countries in particular via
systemic infrastructure such as the G7. At the present point in time, the exit for Japan still seems a long way off.
However, with interest rate hikes already commenced in the US, which has always taken the lead, the key will
be whether or not the ECB will be the second to hike interest rates. During the past 40 years, Europe has always
moved before Japan. A move towards the exit by the ECB would no doubt give a sudden boost to expectations
that Japan will also move towards the exit. As outlined in the following chart, the pattern has been repeated five
times in what we refer to as the ‘5 jinxes’, and we are now on the verge of the 6th jinx.
[ Chart 1: 5 jinxes’ of policy alignment in Japan, the US and Europe since the 1970s ]
(1)
Cycles of policy interest rate hikes by central banks in Japan, the US and Europe have coincided since the
1970s.
(2)
The BOJ has consistently been the last central bank amongst Japan, the US and Europe to hike interest
rate in these cycles.
(3)
There have been concurrent global economic downturns in the year following the BOJ rate hike in each
cycle.
(4)
The phases have coincided with movements in global financial markets as well as problems in developing
countries.
(5)
All five phases have coincided with periods of higher oil prices.
Source: Made by Mizuho Research Institute Ltd. (MHRI)
1
Market Insight
April 6, 2017
[ Chart 2: ‘5 jinxes’ for the financial markets and outlook for the 6th jinx ]
Official discount
rate when the US
started tightening
Official discount rate
when Germany (EU)
started tightening
Official discount
rate when Japan
started tightening
Environment following
Japan’s interest rate hike
1st
Early 1970s
Jan-1973(Second)
4.5% → 5%
Oct-1972 (First)
3% → 3.5%
Apr-1973 (Last)
4.25% → 5%
Global recession from
1974 Bankhaus Herstatt
problem
2nd
Late 1970s
Aug-1977 (First)
5.25% → 5.75%
Mar-1979 (Second)
3% → 4%
Apr-1979 (Last)
3.5% → 4.25%
Global downturn from
1980 Latin American
problem
3rd
Late 1980s
Sep-1987 (First)
5.5% → 6%
Sep-1988 (Second)
3% → 3.5%
May-1989 (Last)
2.5% → 3.25%
Global downturn from
1990 S&L, LBO problems
4th
Late 1990s
May-1999 (First)
4.75% → 5%
(FF rate)
Nov-1999 (Second)
2.5% → 3%
(ECB Policy interest
rate)
Aug-2000 (Last)
0% → 0.25%
(O/N Call rate)
2001 Dot.com bubble
burst
5th
Mid 2000s
Jun-2004 (First)
2.5% → 2.75%
(FF rate)
Dec-2005 (Second)
2% → 2.25%
(ECB Policy interest
rate)
Jul-2006 rate hike
(Last)
0% → 0.25%
(O/N Call rate)
Some talk about an exit
strategy
No sign of an exit
6th
Now
Dec-2015 (First)
0.25%→ 0.50%
(FF rate)
2007 Subprime crisis
Source: Made by MHRI
Looking back on the 5th jinx, which occurred in the mid 2000s, the US Fed hiked interest rates in 2004,
which was followed in 2005 by a rate hike from the ECB, with the BOJ last to hike interest rates in 2006. This
order was the same as in the past, with Japan always last to hike interest rates out of Japan, the US and Europe.
There was a global economic downturn in 2007 triggered by the subprime loan problem, which was then
exacerbated by the tremors in the global financial markets that included the Lehman shock in the following year.
Moreover, there was also an unprecedented spike in the oil price from 2007 to 2008. In the 2000s, there was a
US housing boom driven by subprime loans and an increase in investment in Europe due to the EU integration
boom, which led to unprecedented large increases in financial leverage, followed by levels of adjustments not
seen since the end of World War II. This path matched the criteria for the ‘5th jinx’ on all levels. At the time, it
appeared that Japan would resolve its balance sheet adjustments that had continued since the 1990s, but it was
overcome by the impact of balance sheet adjustments in Europe, once again falling into serious pessimism.
This time, US rate hikes already commenced from December 2015 with the start of the cycle for the ‘6th
jinx’. This represented a turnaround from the global unified trend for monetary easing and even some
developing countries have been making moves to hike interest rates. The global alignment has entered the cycle
for an exit. Even moves by the ECB suggest the search for an exit has begun. If the ‘6th jinx’ is to be achieved,
Japan will once again be the last to hike interest rates. Since the burst of the bubble in the 1990s, Japan’s exit
2
Market Insight
April 6, 2017
strategy from the ‘lost two decades’ has required sudden momentum backed by a US economic recovery. As
long as the US economic recovery continues, i.e., as long as the US continues to hike interest rates, Japan will
be forced to somehow quickly improve sentiment and draw an exit strategy. It is imperative that Japan’s exit
strategy simultaneously takes account of various macro conditions such as the soundness of financial
institutions, including the issues in the bond markets, the sustainability of fiscal policy and inflation. It must
also be implemented during a period of international policy alignment. Although the exit from Japan’s post
bubble period in the ‘5th jinx’ from 2006 was ultimately all show and no substance, it toyed with the turmoil in
international alignment, which raises questions about whether or not Japan can also move towards the exit
during the grace period provided by the current ongoing global recovery.
To escape the vicious cycle of the burst bubble, Japan requires a virtuous cycle of a weak yen and higher
stock prices as well as increased domestic demand under the framework of Abenomics. If this objective is
followed, monetary easing will continue for the near term leading to a weaker yen, while simultaneously
requiring a return to credit expansion. To accomplish this will likely take a number of years, so Japan is most
likely going to be the last to hike interest rates in this 6th jinx as well. Japan leads Europe in terms of balance
sheet adjustments, but to the extent that Europe has not become completely pessimistic about deflation as in
Japan, the hurdle for Europe to achieve the monetary policy exit is not as high. From the outset, the German
central bank (the Bundesbank) has traditionally been very concerned about inflation with a tendency to shift
towards tightening. Furthermore, criticism from the US that Germany is building up a current account surplus
due to a weak euro and the strong dissatisfaction that European financial institutions have with the ongoing
negative interest rate policy means there is likely to be a shift away from negative interest rates to
normalization.
If only considering the situation in Japan, the talk of an exit is still a pipe dream. However, given the
alignment with overseas markets, the past 40 year history suggests a move by Europe would be a major
harbinger of a move by Japan. European moves also need to be closely watched in relation to the ‘6th jinx’ as
well. Market players need to be aware of the major impact that any move by the ECB towards the exit would
have on the interest rate outlook in the Japanese bond markets. In future, BOJ watchers will also need to
become ECB watchers.
This publication is compiled solely for the purpose of providing readers with information and is in no way
meant to encourage readers to buy or sell financial instruments. Although this publication is compiled on
the basis of sources which we believe to be reliable and correct, the Mizuho Research Institute does not
warrant its accuracy and certainty. Readers are requested to exercise their own judgment in the use of
this publication. Please also note that the contents of this publication may be subject to change without
prior notice.
3