About Japanese Price Deflation
Interestingly, despite the fact that the inflation rate is exactly 5%:points lower in Japan than in the U.S. (which has 4.3% inflation), the yen have fallen dramatically (more than 15% ) against the U.S. dollar. This is clearly driven by the higher nominal interest rates in the U.S. But this capital flow is clearly irrational since real interest rates is higher in Japan. The real yield on 10-year bonds is 2% in Japan and nearly zero in the U.S. Combined with the accumulated fall in the yen's real exchange rate which makes the yen look highly undervalued, this means that Japanese bonds actually look more attractive than its U.S. counterparts, despite the lower nominal yields.