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Monday, May 26, 2003

Tightening the Deflationary Screws

Long term interest rates are dropping across the planet. Japan 10 year bonds are now at 0.555 per cent. Looks like we're settling in for the season:

A leading Japanese business daily warned long-term interest rates were falling to historically low levels in Japan, the United States and Europe, amid fears of a deepening global deflationary trend. The yield on newly issued 10-year government bonds, a benchmark of Japanese long-term interest rates, has fallen about two-thirds in a year, the Nihon Keizai Shimbun said. The rate declined to 0.555 percent on Friday, down from the 1.400 percent return offered a year earlier. The daily noted that the yield on 20-year bonds sank to 0.860 percent and that on 30-year instruments dropped to 0.980 percent. This means that the yields on all key Japanese long-term bonds are now lower than one percent, Nihon Keizai said, adding that long-term interest rates are close to future nominal economic growth rates predicted by investors. Private-sector economists have predicted the Japanese economy will suffer negative growth of minus 1.3 percent in nominal terms in the year to March 2004. Japan's price index for consumer goods, excluding perishables, had steadily fallen from year-earlier levels for the past three and a half years, it said.

The deflationary trend is spilling over into the United States and Europe with China emerging as the world's largest manufacturing base with cheap labour and technological innovation, it quoted an analyst as saying. US and European interest rates were already declining rapidly, with the yield on the 10-year US treasury bond touching 3.28 percent on Friday, the lowest level since 1958. The yield on 10-year German federal government bonds slid to 3.6 percent, the lowest return since January 1999. The US consumer price index dropped 0.3 percent in April from the previous month. The US Federal Reserve Board has pointed to a disinflationary trend in which the pace of price growth declines.

The direct cause of recent drops in Japanese long-term interest rates has been the growing movement of funds from stocks to bonds by banks, life insurance companies and pension fund managers, who predict a fully-fledged economic recovery will not occur for some time, it said. Those investors are expecting deflation to adversely affect stock prices through falling corporate sales and income, and are rushing to shift their funds to bonds to protect themselves against that risk, it said. The concentration of investment in government bonds causes a serious distortion in the overall flow of funds, the daily warned. But even if financial authorities relax their grip on credit, most of the funds made available will make their way into government debt instruments, with lending to corporate borrowers continuing to drop and little money being funneled into stock purchases
Source: Yahoo News

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