Japan’s lesson for U.S. on bond yields: Look out below

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In the race for the bottom on short-term interest rates, the U.S. clearly has won.

But if Japan still has something to teach us about rates, it’s how low long-term bond yields can go.

Japanese government bond yields, already the paltriest in the industrialized world, fell further today after the Bank of Japan cut its benchmark short-term rate to 0.1% from 0.3%. The central bank warned that ‘economic conditions have been deteriorating and are likely to increase in severity for the immediate future.’

Japanese policymakers’ decision followed the Federal Reserve’s move on Tuesday to slash its key rate to a range of zero to 0.25%, from 1%.

The Bank of Japan also took another page from the Fed’s playbook, by announcing that it would begin buying commercial paper (short-term corporate IOUs) to ease ‘tightness in corporate financing,’ and that it would investigate buying other debt in the market.

The central bank already buys Japanese government debt, and said it would increase those purchases, adding 30-year bonds to its list of eligible securities.

The Fed this week said it was considering buying U.S. Treasury securities as a way of putting more downward pressure on longer-term interest rates.

If we’re about to emulate the Japanese experience with government bond yields, U.S. yields have a lot further to drop.

The Japanese 30-year government bond yield now is at 2.04%, compared with 2.56% for the U.S. 30-year Treasury.

The Japanese 10-year government bond pays 1.24%, compared with 2.13% for its U.S. counterpart.

Look out below?