Abstract

East Asian, and primarily Chinese and Japanese, excess saving has been comparatively large and controversial since the 1980s. Its contribution to the decline in the global “natural” rate of interest is consistent with Bernanke’s much debated “savings glut” hypothesis for the decade after 1998, though empirical explorations of of this have proved unconvincing. In this paper it is argued that the comparatively integrated global market for long bonds is suggestive of trends in the global “Wicksellian” natural rate and that the longer term evidence supports a leading role for Asia’s contribution to the expansion of ex ante global saving in explaining the declining trend in real long yields. Evidence is presented that trends in US 10 year bond yields are indeed representative of those in the global natural rate. The relationship between these yields and excess saving in China and Japan is then explored using a VECM that accounts for US monetary policy. The results support a negative long term relationship between 10-year yields and the current account surpluses of China and Japan. Projections based on these results suggest feasible future declines in Japanese and Chinese excess saving could cause the path of long rates to to be higher by 330 basis points over the next decade.

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