Pimco’s Masanao Says Risk Rally May Falter, BOJ Near Exhaustion

  • BOJ’s shift will extend longevity of easing policy, he writes
  • Move is short-term positive for assets, may not be sustained

The Bank of Japan’s decision to shift its monetary easing regime is positive for higher-yielding assets though the rally may falter as it becomes increasingly clear the central bank is near policy exhaustion, according to Pacific Investment Management Co.

Asian and European stocks and U.S. equity index futures rallied after the BOJ refrained from moving deeper into negative interest-rate territory and instead switched its focus to controlling the yield curve and away from expanding the money supply. The decision weakened the yen and pushed the nation’s 10-year bond yield above zero for the first time since March.

“Today’s policy decision is positive for risk assets for a short-term but sustainability of risk assets rally is questionable,” Tomoya Masanao, Pimco’s Tokyo-based head of portfolio management in Japan, wrote in an e-mail Wednesday. “The BOJ’s policy exhaustion is increasingly clear. Compressed risk premium should be re-priced to some extent.”

The BOJ said its target for expanding the monetary base through asset purchases, previously set at 80 trillion yen ($780 billion) annually, may now fluctuate in the short term to enable policy makers to control bond yields. It also pledged to expand the monetary base until inflation stabilizes above its 2 percent target.

“The decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect,” Masanao wrote. “The decision is also an optimization of the BOJ’s toolkit for longevity of monetary easing -- given that a war against deflation is longer than they probably thought.”