Whatever else you can say about the new turn in Japanese policy, it’s offering a great demonstration of the peculiarities of zero-lower-bound economics. (JGBs meet the ZLB, OK!)
The key point here is that Japanese short-term rates are hard up against zero. Long-term rates aren’t, but they’re still constrained: the long rate is, to a first approximation, the average of expected future short rates; short rates can go up but not down; so the long rate is kept some ways above zero, no matter how bad the current economy, by this one-way option. Long rates are also, as part of this process, fairly sticky, responding only slightly to changes in economic fundamentals. (Serious econowonks may recognize the affinity with the old target zones literature).
As a result, Japanese long rates have dropped much less than rates in other advanced countries:
And now that Japanese policy makers have, at least for now, managed to persuade markets that deflation will give rise to mild inflation, this has not been reflected at all in a rise in nominal interest rates; instead, it’s all a fall in real rates. In the figure below, from here, the orange line is the nominal rate on 10-year Japanese bonds; the green line the rate on inflation-indexed bonds; and the red line the implied forecast of inflation:
It’s actually quite beautiful, if you have an economist’s warped aesthetic sense. And it’s also very good news for Japan.