Why we believe that the 10-year interest rate in the United States and the euro zone cannot fall to 1% as in Japan

- "During the summer of 2010, long-term interest rates fell to an extremely low level in the United States, Germany and France. We seek to determine whether they will fall to 1%, as in Japan, despite the surge in the public debt ratio, in a deflationary environment of sluggish growth and a rise in private savings, with highly expansionary monetary policies, a fall in asset prices and deleveraging."
- "We do not believe this will happen, given the significant structural differences between Japan on the one hand and the United States and the euro zone on the other hand:
• it is difficult to believe that US and European banks will accumulate the same huge government bond portfolios that Japanese banks have, and take the same massive transformation risk;
• the Japanese stock market was considerably overvalued in the late 1990s, which is not the case today in the euro zone or the United States, and which explains the switch from equities to bonds in Japan;
• Japan’s overall excess domestic savings cannot be found in the euro zone, let alone in the United States where there is a shortfall in savings;
• we do not believe that growth in nominal wages, in service prices and hence in prices as a whole can become negative in the United States and the euro zone, as it is in Japan;
• in Japan there is no arbitrage with emerging country bonds."

Natixis Flash Economics 446 20100909

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