Why do Japanese bonds have such low yields?
Japan's bond yields are lower than Italy's, even though Japan has a higher deficit and debt level
First of all, it should be noted that interest rates really aren't as low in Japan as they might appear at first glance. Japan has, and has had for many years, an inflation rate two to three percentage points lower than in the euro area, so its bond yields of slightly above 1% is actually the equivalent of slightly more than 3 to 4%.
However, even after that adjustment, Japan still has lower interest rates. Some people argues that it is the fact that Japan has a current account surplus, while Italy has a deficit, combined with the existence of a "home bias" among investors, that explains it.
That is probably one partial explanation, as many Japanese savers have indeed a strong "home bias", in part due to aversion to exchange rate risks, in part due to xenophobia.
Another explanation is that there is currently a self-fulfilling prophecy (aggravated by the recent ill-advised ECB interest rate increase) in markets about the risks of certain European governments. Until recently, when differences in deficits and debts were more or less the same, the difference in inflation adjusted yields were very low.
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.