Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., manager of the world’s biggest bond fund, comments on the outlook for Japan’s government bond market, fiscal and monetary policies. He spoke in an interview in Tokyo on Jan. 7.
Prime Minister Shinzo Abe is aiming to achieve 3 percent nominal growth and 2 percent inflation, twice the level of the Bank of Japan headed by Masaaki Shirakawa.
Domestic stocks have rallied and the yen has dropped to the weakest in more than two years against the dollar as speculation grew the BOJ will join forces with the government to revive the deflation-ravaged economy. The benchmark 10-year JGB yield closed at 0.825 percent yesterday.
“For now, we take a cautious view on JGBs, especially on the long and super-long end of the curve.”
“We don’t think the current valuation is sufficient for the risk premium that investors should demand to be compensated for changing policy risks. We need to be cautious as to how much government spending will increase.”
“We are overweight on 5-7 years but underweight the shorter maturity sector as its yields are very low.”
“Over the long-term horizon, our investment strategy for JGBs remains centered around our belief that Japan will not be able to exit deflation without a structural breakthrough.”
“Japan remains a clean dirty shirt from a credit standpoint.”
“Government bonds in most developed markets are all unattractive, not just JGBs.”
Yen, BOJ Policy:
“We cannot ignore the moves in currency and equity markets in the short term.”
“It’s obvious monetary policy in Japan will become looser.”
“Governor Shirakawa’s BOJ has been treating the currency as an input or exogenous variable for monetary policy, responding to the potential economic impacts of currency moves, but that is poised to change under the new governor.”
“The BOJ will probably place currency as an interim target for monetary policy in the future.”
Former Prime Minister Yoshihiko Noda and BOJ Governor Shirakawa “was probably the best combination that the JGB market can hope for, in that the government pursued fiscal austerity with higher tax rates and the central bank tolerated deflation.”
“That is about to change with the government increasing spending at least in the short term and the BOJ likely to have someone in its leadership that will be committed to reflate the economy.”
“Two percent inflation would be difficult to achieve unless the yen weakens massively.”
“With the 10-year government yields already at 0.8 percent, there are limits as to how much the BOJ can stimulate investment and domestic demand by lowering borrowing costs.”
“Japan’s deflation problem is a long-term structural issue that reflationary policy by the government and the central bank alone can’t resolve.”
“We need some breakthroughs in structural reform such as deregulation of the labor market and service sector to end deflation.”