The NLI Research Interest Rate Leading Indexes and Japan's Recent Monetary Policy

Tomohiko Takahashi
Policy Research Department Chief economist Yasuhide Yajima

Summary

Since the recession began in March 1991 following the collapse of the bubble economy， nine official discount rate cuts， combined with measures to induce short-term interest rates downward， have brought interest rates to unprecedented lows. While low interest rates have caused an income transfer from households to the corporate sector and parts of the financial sector， they have also impacted the macroeconomy positively through a recovery in fixed capital investment， increased residential investment， support for stock prices， and weaker yen.
In the medium term， the economy is confronted with issues such as adjustment of the industrial structure amid the strong yen and mega-competition， and massive bad debts and fiscal restructuring as an aftereffect of the bubble economy. Continuation of the low interest rate policy is expected due to the recovery's weakness. Despite these weaknesses， however， signs of recovery have prompted the monetary authorities to look for the right timing to revise the emergency mesures taken last September amid growing concerns over deflation.
To predict trends in monetary policy， NLI Research Institute has developed two leading indexes for interest rates based on various monthly statistics. Index (I) is a diffusion index， while index (II) is based on principal component analysis. Both indexes have performed well in predicting past turning points in monetary policy ( e.g.，a shift to multiple interest rate hikes or cuts) .
While the interest rate leading indicators have recently been bullish as a reflection of the overall improvement of the economy， based on experiential rule of the past， they have not yet signable a policy shift to multiple interest rate hikes. Thus while last September's emergency measures to induce short-term rates lower may be lifted and some upward adjustment may occur in the official discount rate， present economic conditions do not warrant a policy shift to multiple interest rate hikes.

Yasuhide Yajima