While Japanese government bonds yield less than half of their U.S. counterparts, the Japanese bonds were the world’s best performers in the last month.
That’s because the yen’s strength and Japan’s vicious deflation boosted Japanese bonds’ inflation-adjusted (real) return in dollar terms.
Japan’s bonds produced a return of 3.6 percent in dollar terms over the past month, according to Bloomberg. In yen terms, the bonds have only returned 0.83 percent for the whole year.
Japan’s 10-year bonds yield just 1.28 percent, compared to 3.53 percent for 10-year Treasuries. But with Japan’s deflation at 2.6 percent, real yields are 3.88 percent. That compares to 3.70 percent for Treasuries.
And falling prices in Japan will likely keep boosting bond returns in coming months, experts say.
“The deflation trend could continue until 2011,” Hideo Shimomura, chief fund investor at Mitsubishi UFJ Asset Management, told Bloomberg.
“There might be an expansion in the government budget, but when people start to look at the fundamentals, yields are going to move down.”
The median estimate of economists surveyed by Bloomberg is for 1.2 percent deflation next year.
Japan’s bond returns also are benefiting from the yen’s 8.3 percent surge against the dollar over the past six months.
The deflation is bad news for Japan.
"If price deflation leads to asset deflation and that leads to further deterioration, then that will lead to the collapse of the economy," JPMorgan Securities chief economist Masaaki Kanno told Time magazine.
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