Future Expected Returns In A Zero Interest Rate Policy (ZIRP) Environment

The last decade has produced fantastic returns in most global asset classes (commodities excluded), helped by enormous interventions by central banks. Can we expect similar high returns in the coming decade?

The “new normal” (?):

The “new normal” seems to be a low interest policy for the foreseeable future. How do we adapt as investors?

Japanese investors have battled with Zero Interest Rate Policy (ZIRP) for two decades and Japan might offer some clues as to what to expect. Since 1999 Japanese government bonds have been around 1% and thus made low rates pretty “normal”.

Japanese performance during ZIRP:

Japan is thus an interesting case study for the coming decade(s).  Verdad, a global asset management firm, recently sent out an interesting research report via e-mail showing the annual performance of different asset classes in Japan during ZIRP (I recommend signing up for Verdad’s weekly e-mail service):


The performance of different asset classes in Japan during ZIRP. Source: Verdad.

The table shows small value stocks and real estate were the best performing asset classes. According to Verdad, the outperformance of small value was a reversal of the trend prior to ZIRP where large stocks led the way into the dotcom bubble, and real estate was beaten down in 1999 after the collapse of the real estate bubble in the early 1990s.

What about correlations?

Correlations during ZIRP in Japan. Source: Verdad.

Even though government bonds yield a measly 1%, it hasn’t lost its value as a tool for diversification. The correlation matrix shows that bonds produces a negative correlation, thus providing significantly less drawdowns in a portfolio.

How did the Japanese banks perform?

In ZIRP we can expect banks to perform worse than if the rates were higher. This was certainly the case in Japan as banks underperformed dramatically, according to Verdad. The bank struggled with bad loans from the 90s and this, coupled with a low interest margin, made most banks returning negative returns over the last two decades.


Interest rates can of course go even lower into negative territory, as is the case in some countries. However, the performance of the last decade is unlikely to be repeated if Japan is any judge of what to expect.


Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 2rd of July 2020.)