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U.S. May Suffer Japan-Style Deflation, Schroder Says

Aug. 11 (Bloomberg) -- The U.S. is no longer an engine for the global economy and may suffer deflation sometime in the next three years, said Genji Tsukatani, head of fixed income at the Japanese unit of Schroder Investment Management Ltd.

Ten-year Treasury yields slid to a 16-month low after the Federal Reserve said yesterday the U.S. economic recovery will be “more modest” than previously anticipated. The spread between yields on U.S. and Japanese 10-year debt is at the narrowest since May 2009.

“The aftereffects of the credit bubble along with the aging population mean it’s possible that the U.S. will slip into deflation” in the next three years, said Tsukatani, whose company manages about $211 billion in assets globally. “If real interest rates fall in the U.S., it’s likely to drag down those in Japan.”

Tsukatani said he derives real interest rates by subtracting inflation rates from 10-year bond yields. Deflation increases the value of the fixed payment from bonds.

Scott Mather, head of global portfolio management at Pacific Investment Management Co., wrote in an article this week that “the risk is rising” that the U.S. will follow a similar path to Japan’s. St. Louis Fed President James Bullard wrote in a report released last month that the U.S. is “closer to a Japanese-style outcome than any time in recent history.”

Lost Decade

Japan went through a period of stagnant growth and continuous price declines starting in the 1990s that has been called its “lost decade.”

Governments around the world have boosted spending over the past two years to help their economies recover from the deepest global recession since World War II. The U.S. government projects its budget deficit will swell to a record $1.6 trillion in the year ending Sept. 30.

U.S. real interest rates, calculated by subtracting consumer prices excluding food and energy from 10-year bond yields, fell to 1.82 percent yesterday, the lowest since Jan. 29, according to data compiled by Bloomberg. That’s below the 2.51 percent rate in Japan, where core consumer prices have dropped for 18 consecutive months.

Seven-Year Low

The yield on Japan’s benchmark 10-year fell to 0.995 percent today, matching a seven-year low set Aug. 4. Schroder’s Tsukatani says yields are unlikely to rise above 1.20 percent because of a possible economic slowdown.

“It’s still unclear how deep and long the economic slowdown will be,” he said. “We have yet to figure out when the economy will start to pick up again.”

The International Monetary Fund last month forecast the U.S. economy will grow 2.9 percent next year, well behind China’s 9.6 percent expansion and India’s 8.4 percent.

“The U.S. hasn’t been an engine for the world’s economy since around 2005 but it’s being driven by countries like China and India whose economies grow 8, 9 percent,” Tsukatani said. “With slowing population growth and more emphasis on debt reduction, the U.S. economy probably won’t grow that much.”

A total of 12.8 percent of the U.S. population was 65 years or older at the end of 2009, up from 11.3 percent in 1980, Bloomberg show. That compared with 22.2 percent in Japan.

To contact the reporter on this story: Masaki Kondo in Tokyo at; Yumi Ikeda in Tokyo at

To contact the editor responsible for this story: Rocky Swift at

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