The High Japanese Real Interest Rates
Japan thus bucks the trend among most advanced economies of rising inflation (With inflation being roughly 2.5% in the U.S., 1% in the euro area and 3% in the U.K.) and has persistent deflation.
Because inflation has returned elsewhere and because nominal interest rates are close to zero almost everywhere else except Australia and New Zealand, Japan has thus much higher real interest rates than other countries. The real short term interest rate is almost 3% in Japan, far higher than 0% in the euro area and nearly -2.5% in the U.K. and the U.S. Indeed, the real Japanese short term interest rate is even higher than in New Zealand (about 1%) and Australia (about 2%)
Comparisons of real long term interest rates is less favorable to Japan but even there, its current real 4% yield is higher than in Australia (3.5%) and New Zealand, not to mention the U.S. (1%), the U.K.(1%) and Germany (2%). Only Greece (5%) offers a higher real yield right now.
This makes Japanese bonds look seemingly attractive at this point. For the debt burdened Japanese government the current elevated level of real interest rates is a lot less pleasant. And for this reason, it is likely that the Bank of Japan will at some point use more aggressive measures to halt deflation, which of course would make Japanese bonds a lot less attractive.