Where Yields are Lower than Low
Longer-term bond yields have been falling in much of the world this year, echoing the U.S. market’s rally. But nowhere has the decline been as pronounced as in Japan--where interest rates are already among the world’s lowest.
Ten-year government bonds in Japan yielded 4.55%, annualized, at the start of the year. Now they pay 3.91%. That represents a 14% decline in the yield itself (i.e., in the amount of interest paid).
In contrast, the decline on 10-year U.S. Treasury note yields has been about 9%, from 7.82% at the start of the year to 7.11% now.
Japan’s interest rates have long been lower than those of all other industrialized nations, a function of the country’s minuscule inflation rate and its gigantic trade surplus. Japan’s severe recession for most of the early-1990s kept continuing downward pressure on rates.
This year, Japanese bonds have rallied briskly as some domestic investors have brought money back home from overseas, in the process bolstering the mighty yen and slashing the dollar’s value.
Now, the crisis engendered by the yen’s surge and dollar’s plunge--a severe threat to Japan’s exporting companies--is bringing calls for an official cut in Japan’s short-term interest rates, says Kenneth Leung, analyst at Bankers Trust Co. in Tokyo.
As in the United States, the market controls long-term yields in Japan, whereas the central bank controls short rates. But while U.S. long-term yields now appear to reflect expectations that short-term rates here will stay flat, Leung and other analysts say Japanese bond yields already factor in a huge drop in short rates.
How huge? The Bank of Japan’s official discount rate, currently 1.75%, will have to fall to a mere 1.25% soon to meet market expectations, Leung says. While he doubts that such a move would do much for the Japanese economy or weaken the yen, without a discount rate cut Leung warns that Japan’s bond yields could quickly rebound, slamming investors and potentially creating yet another financial crisis in the country’s financial markets.
