Pimco Not Ready to Buy JGBs as Japan Inflation Expectations Rise

Pacific Investment Management Co. isn’t ready to increase holdings of Japanese government bonds as the nation’s policy makers seek to overcome deflation.

“There’s no need to be in a hurry to buy JGBs at the moment,” with 10-year yields around 0.8 to 0.9 percent, Tomoya Masanao, head of portfolio management for Japan at Pimco, the operator of the world’s biggest bond fund, said in an interview in Tokyo. “I used to think the chance of 2 percent inflation in Japan was close to zero, but now, while the likelihood of that is not high, it’s certainly higher than before.”

The Bank of Japan decided on April 4 to double bond buying to more than 7 trillion yen ($73 billion) a month to achieve 2 percent inflation in two years. Consumer prices will probably rise 0.1 percent this year and 2 percent in 2014, according to the median estimates of economists in a Bloomberg News survey.

Japan’s 10-year yield rose one basis point, or 0.01 percentage point, to 0.845 percent at 1:56 p.m. in Tokyo from yesterday, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield dropped to a record 0.315 percent a day after the BOJ’s April policy decision, then surged to a 13-month high of 1 percent on May 23.

The central bank is set to buy more than 50 percent of the debt the government plans to issue this year, according to data compiled by Bloomberg. Historical price volatility of Japan’s five-year notes climbed to 0.72 percent today, the highest since March 2011, according to Bloomberg data based on 60-day reading.

Tail Risk

“The volatility in the JGB market was a surprise to policy makers,” Masanao said. Abenomics caused a “big secular shift on how investors look at JGBs,” he said, adding that they should demand a higher risk-premium with the rising volatility and the potential “tail risk” of higher inflation.

Prime Minister Shinzo Abe has pledged to end 15 years of deflation in Japan with monetary and fiscal stimulus and a growth strategy to loosen business rules.

Even if Japan succeeds in achieving the price target, the nominal 10-year yield will probably be less than 3 percent as policy makers keep monetary policy accommodative, according to Masanao.

Pimco, which is based in Newport Beach, California, and is a unit of the Munich-based insurer Allianz SE, manages $2.04 trillion in assets.

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