When Japanese interest rates first fell towards zero, the Japanese government yield curve steepened sharply as it was assumed temporary, and that interest rates and bond yields would rapidly “normalise” or mean revert at levels more typical of the 1980s and ’90s. With about a 20-year lag, the Eurozone now appears to be experiencing the same phenomenon, and has met similar policy responses.
Like Japan, Eurozone policymakers denied there was a deflation threat, or problem with the banking system, and 10 year Bund yields barely moved from 4% in the post-Lehman period, as Chart 1 shows. Investors in Bunds asked “ Crisis, what crisis?”, and the ECB actually raised interest rates in 2010/11 to deal with an inflation “problem”.
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