Anyone know how the Japanese govt finances their debt at a lower rate than America?

Dave, in a post on his blog, wondered how the Japanese government manages to finance their debt at a lower yield than America, even though it has a lower credit rating and has a far higher debt as percent of GDP:

I've wondered for some time about why Japan has so much lower borrowing costs than the U.S., despite having a lower sovereign debt rating and a much higher ratio of debt to GDP, but I haven't heard a convincing explanation yet.

I'm not an economist and don't work in the industry but here is the guess I responded with (I added more here):

I suspect it is because something like 90% of the government debt is owned by individuals. As for why individuals choose to invest at such low returns, that's hard to say. I imagine it's because bonds have outperformed all other major assets (such as stocks and real estate). It should also be noted that Japan was experiencing a major bull market in bonds so retail investors had a huge incentive to own bonds.

Another thing to note is that real yields aren't that different in Japan. Given their near-zero, and indeed periodically negative, inflation, Japanese investors were probably earning the same real return as anyone investing in American bonds in the last decade. As a rough example, without me looking up actual numbers, a Japanese investor probably earned 2% real return (say 1.5% yield plus +0.5% from deflation) while an American bondholder may have been earning 2% due to a 4.5% yield and -2.5% from inflation (I'm ignoring fluctuations in currency here--if you are actually investing, you should think hard about potential currency movements.)

Anyway, enough with my guesses. Does anyone reading this know how the Japanese government manages to issue bonds at lower interest rates than the American government?


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