Interest rates in Japan are remarkably low: 30-year JGBs currently yield 2.22% and 10-year JGBs yield 1.33%. In contrast, 10-year Treasuries yield 3.75% and 30-year Treasuries yield 4.66%, so 10-year Treasuries have 242 bps of yield advantage and 30-year Treasuries have 333 bps of yield advantage vs. JGBs.
Why are interest rates in Japan so low? The proximate cause is that Japan seems to be locked into post-bubble deflation. And why is that? Couldn’t Japanese monetary authorities simply do a helicopter drop of cash into the economy to defeat deflation?
In an April 15, 2010 Financial Times article, David Pilling writes:
Economically, and in spite of this week’s formation of a ruling-party faction that favours inflation-targeting, the country’s leaders nourish a fatalistic acceptance of deflation. True, 15 years of more or less continuously falling prices have not triggered the crisis some predicted. But falling nominal output has accelerated Japan’s relative economic decline.
…
Yet many Japanese seem more at ease with the idea of stately decline and genteel isolation. One of Japan’s most popular books in years, The Dignity of a Nation, even suggested Japan should stop teaching its children English and withdraw from the world trade system altogether. Short of such radicalism, many people ask what is wrong with being a backwater of wealth and civility in an out-of-kilter world.
…
For Japanese with jobs and access to savings, even deflation can be a boon. “We are just quietly enjoying our affluence,” says one satisfied customer.
David paints a picture of a sleepy, backwater Japan where people “with jobs and access to savings” are not particularly bothered by deflation.
USD/JPY is currently 92.06. YCS closed at 20.77 on Friday, April 16.