One has to assume that the law of gravity will not be repealed and that investors will want something more than 2% on the ten-year bond if inflation is at 2%. If the ten-year bond were to rise by 2%, Japan would soon be spending over 50% of its tax revenues on the interest carry alone.
Perhaps bond investors are willing to accept negative real rates of return. Folks have bid up TIPS in the U.S. to negative real rates.
Negative real interest rates are very good for holding down the ratio of debt to GDP. We saw that in the United States in the 1970s. But the 1970s are not so fondly remembered as far as economic performance and financial wealth are concerned.
Might there be tax advantages that explain why certain “risk-free” bonds have been bid up to negative interest rates?
metaphors like the “law of gravity” are similar to “divine rights” of medieval kings. It’s a bargaining situation and there is not “natural law” that one side is entitled to anything like a positive real return.
Right, but since people prefer to consume now rather than later, and prefer a dollar for sure over a dollar under uncertainty, it is bizarre when the rate of return is negative. If this were gravity, we should not conclude that the law is overturned before we have carefully examined all sorts of frictions and other explanations.