Canadian Treasury bills are yielding 2.6% and the annual inflation rate in Canada is 1.8%. What is the inflation rate in Japan if the short-term government bonds in Japan are yielding 1.2%?

Question

Quizplus · Accepted Answer

The real yield (yield after adjusting for inflation) of both countries' government securities should be equal assuming no currency risk and that markets are efficient. The real yield in Canada is 2.6% - 1.8% = 0.8%. Therefore, for the real yield in Japan to also be 0.8%, the inflation rate in Japan must be 1.2% - 0.8% = 0.4%.

Canadian Treasury Bills Are Yielding 2