BlackRock Japan’s Endo Says No Point Betting Against BOJ Pledge

Shigeru Endo, a Tokyo-based fund manager at BlackRock Japan Co., a unit of the world’s largest money manager, comments on Japanese government bonds and the Bank of Japan’s monetary policy.

The 10-year rate touched 0.51 percent on March 28, the lowest since June 2003, when an all-time low of 0.43 percent was reached. The 20-year and 30-year yields also dropped to the least in almost a decade last week.

Endo spoke in an interview in Tokyo on March 26, declining to comment on a specific investment strategy.

On BOJ policy:

“There’s no point in betting against a central bank that is pledging aggressive policy no matter what.”

“There’s hardly any yield on the short end, so Governor Kuroda’s stance is that the BOJ must buy assets with a little more risk premium for the easing to have any significance. The BOJ will probably increase buying of longer-dated bonds.”

“The BOJ’s purchases of debt of more than one year will probably increase about 20-25 percent. The central bank’s stimulus would not seem aggressive unless it also increases bond buying of more than 10 years’ maturity.”

On Japan’s bonds:

“While the 10-year yield has had a sharp surge from a record low in 2003, it may be different this time around. The BOJ will continue to buy and a sudden surge in inflation is unlikely.”

“The 10-year yield has not risen above 1 percent and the range has been grinding lower since last spring when the BOJ under Governor Shirakawa expanded the maturity of bonds it purchases under its asset purchase fund to three years. If we assume that QE expansion had an impact on the market, it’s possible yields will stabilize at very low levels going forward.”

“The actual effectiveness of Kuroda’s policy doesn’t really matter as it’s solely aimed at driving up people’s expectations.”

On bank-note rule, fiscal health:

“The new BOJ regime is likely to abolish the bank-note rule. If the BOJ does so and buys large amounts of long-term securities, some of those would also be funded by the central bank’s excessive reserve deposits, not only by cash currency in circulation on its balance sheet.”

“When we enter a policy tightening phase, the BOJ may have to sell JGBs because of tighter funding conditions, even if they raise the interest rate on excessive reserves.”

“Given Japan’s high debt-to-GDP ratio, the market would be in a big mess if the central bank has to sell JGBs. There’s a risk that the BOJ would not be able to exit from QE even if they want to.”

“The deficit in Japan’s primary balance will only decrease by a half in 2015-2016, even with the planned sales tax increase to 5 percent unless social security costs are cut. The government is walking on a tight fiscal rope.”

“The best scenario would be for tax income to increase and the nation’s fiscal position to improve.”

On inflation target:

“We can’t deny the fact that achieving a 2 percent inflation target in two years accompanied by wage growth will be very difficult.”

“I hope that the market will not judge the inflation rate falling short of 2 percent in two years as a failure. If the BOJ becomes too fixated on CPI alone, there is a risk that they have to continue easy monetary policy when there are market imbalances. There’s a risk that the flexible discretion of the traditional central bank will be lost.”

“The risk is that even if there is inflation, price increases will be limited to import costs and hurt growth.”

“Inflation-linked bonds are being squeezed as continued buying by the BOJ and the Ministry of Finance reduces liquidity and ‘Abenomics’ drive up inflation expectations.”

“The breakeven rate doesn’t necessarily represent the consensus view on inflation in the market.”

On yen:

“Should the Fed exit from QE earlier, that will lead to widening of U.S. and JGB yield spreads and that will drive further yen weakness. That’s one of the risks in the coming 12-18 months that could change the JGBs’ trading range.”

“An excessive artificial weakening of the yen could trigger capital outflows if households panic that the yen will become dirt cheap.”

“The JGB market has been stable because 91 percent is owned by domestic investors. I don’t think that is going to change dramatically, but it’s essential to keep confidence in JGBs and the yen.”

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