Japan has had its discount rate in the zero lower bound range for many years. If the Fisher effect had any truth to it, we should have seen the real interest rate return back to its natural level of 1% or so. What do we see? (link to updated graph)
The graph shows Japan’s central bank discount rate, GDP yoy growth rate, CPI minus food and energy and the real interest rate. The real rate (green line) did in fact return to and stabilize around its natural rate of 1% just as the Fisher effect would expect. This evidence supports the long run Fisher effect.
Inflation did jump up in the late 1990’s which looks to reflect GDP reaching its natural level. GDP (red line) rose and then declined transferring the momentum of nominal GDP into prices (violet line).
The real interest rate stayed close to its natural rate from 2000 until the crisis. Then after the crisis, the real rate returned once again to its natural rate until Abenomics pushed inflation up above the discount rate. The real rate fell again.
The question now is… Is the inflation in Japan temporary? Will the real rate return to its 1% natural rate pushing inflation back down? Will Japan’s central bank keep the discount rate near the zero lower bound?
Will Japan ever understand the Fisher effect?
Update updated: Graph above has been fixed, thanks to Mark Sadowski. Here is a graph just for the real interest rate based on Japan’s discount rate and CPI without food and energy.