The current dollar-yen exchange rate is 110/$. The 3-year forward exchange rate is 100/$. The yield on 3-year US Treasury notes is 2.5% per annum, compounded continuously. Estimate the yield on 3-year JGBs (Japanese Government Bonds) to the nearest basis point.

Explain the logic of the gap between the US and Japanese yields in terms of how an investor equates returns on 3-year investments in the two countries.