The Japanification of bond markets

IN THE 1920S E.M. Forster, an English novelist, set out the difference between a story and a plot. “The king died and then the queen died” is a story, he wrote. But a sense of causality is needed to make a plot more than just a sequence of events. “The king died and then the queen died of grief” is a plot.

Investors like stories as much as anyone. They like plots even more. A durable narrative, and one that is on everybody’s lips once again, is “Japanification”. A Forsterian summary might read: “The bubble burst, people became cautious and the economy got stuck in too low a gear to stop prices and interest rates from falling.” In its strongest form Japanification is a pure tragedy, in which rich, debt-ridden economies are destined to follow the path set by Japan. In another, softer version only countries with rapidly ageing workforces, such as Germany, are thus fated.

Germany’s bond market is now priced for endless stagnation. Its interest rates are negative on everything from overnight deposits to 30-year bonds. But it is striking how depressed bond yields are in countries with only a passing resemblance to Japan. A 30-year American Treasury yields just 2%, for instance. As currently scripted, Japanification is narrowly defined but broadly applied. It is the fear that policymakers have lost for good their ability to...

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