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This article discusses why the interest rate on Japanese government bonds is so low in comparison with other industrialized countries with a better credit rating, after correcting for inflation differences. We find that the net savings surplus has kept the long-term interest rate low. Japanese interest rate movements are much better explained by the current account balance in comparison with other industrialized countries. For most industrialized countries the results are statistically insignificant. For a country integrated in international financial markets, the savings-investment balance should theoretically not have a significant impact on domestic long-term interest rate formation. Institutional factors have contributed to this higher level of significance for Japan in comparison with other countries. Monetary policy and institutionalized purchases of government bonds by semi-government agencies have kept demand for bonds high and the interest rate low.
