Japan's Impact on the U.S.

There is interesting comparison of of JGB and UST rate paths at the Big Picture and the Skeptical Speculator throws in a look at how the Nikkei performed. While it is an interesting coincidence I have a hard time getting over the idea that it is Japan's current economic troubles that are helping to pull U.S. rates down and not an inevitable reaction to the popping of a stock market bubble.

Also, the most unique part of Japan's history is the 1994-1999 segment where rates fell from a 4 handle to a 1 handle. The policy mistakes (failure to clear out bad loans and banks mostly) in that period led to the long bottoming process we are seeing in that economy. The U.S. rate cuts of 2001-2003 were done specifically to avoid the deflationary trap that Japan fell into and so far it has worked. This comparison of bond yields also ignores the very different saving and fiscal situation of the two countries. Japan's high saving rates bias its policies towards deflation (defending the purchasing power of savers) while the U.S. will lean towards inflating its debts away.

I think JGB yields bottomed in March of '03 which not coincidentally is when U.S. deflation fears peaked. I would rather bet on U.S. interest rates following Japanese rates in the present than in the mid 90's.