BoJ rates likely to turn positive soon, Pimco predicts

The Bank of Japan may scrap its negative interest-rate policy as soon as March and make multiple hikes this year, adding to the bearish outlook for the nation’s government bonds, according to Pacific Investment Management Co. 

The last adherent of sub-zero borrowing costs is expected to raise its benchmark to 0% in March or April, before hiking to 0.25% by year-end, Pimco said in a market-outlook report. Quickening wage growth is likely to create persistent inflation in the economy, ensuring “supportive” conditions for exiting negative rates, according to the $1.9 trillion money manager.

“It’s likely going to be a two-shot type of move to get to 0.25%,” Stephen Chang, a fund manager at Pimco in Hong Kong and co-author of the report, said in an interview. The increase may be in 10 basis-point, and then 15 basis-point increments, he said, adding Pimco favors a lower-than-benchmark exposure to the Japanese bond market in some strategies based on its views.

Fund titans such as Pimco and RBC BlueBay Asset Management are preparing for when the BOJ will finally raise rates back above zero, ending an eight-year-long period of negative borrowing costs that convinced Japanese investors to send trillions of dollars overseas. The repatriation of those investments may already be starting with funds from the Asian nation selling a record amount of European debt in recent years.

The BOJ late last year “de facto ended its yield curve control” by announcing its 1% cap on 10-year yields would be a reference rate rather than a hard limit, underscoring its progress toward rate hikes, Pimco analysts wrote in the report. While the New Year’s Day earthquake in northwest Japan spurred traders to pare bets on policy tightening in January, Pimco said the natural disaster will ultimately have only a minimal impact on the economy. 

“The ultra-loose monetary policy that Japan has pursued for the last 20-plus years thus looks set to be finally phased out,” Chang and his colleagues wrote in the report. 

Pimco’s global economic adviser Richard Clarida had said in October the BOJ may axe its yield-curve-control program before the end of last year.

‘Overwhelmingly Bearish’

While Pimco is bearish on Japanese bonds, the money manager says it’s more neutral on their Chinese counterparts. 

Market sentiment toward China has been “overwhelmingly bearish” due to the fragile property sector, geopolitics, demographics and debt, the analysts wrote in their report. The government’s focus on strategic sectors may help offset some of the drag, while the authorities are likely to introduce supportive but not aggressive stimulus measures, they said. 

Pimco sees Beijing making one or two cuts in the medium-term-lending-facility rate totaling about 20 basis points in the first half, and expects 10-year bond yields to hover around 2.5%. The money manager favors going underweight the debt issued by the nation’s policy banks — state-funded firms that provide targeted loans to areas seen by authorities as needing help. 

China bonds still have a place as “a very good option in terms of using it as a diversified, scalable market” in a global portfolio, Chang said. 

Other views from Pimco:

• Prefers going overweight Australian longer-maturity bonds on expectations the securities will outperform US Treasuries
• Favors the Indian rupee and Indonesian rupiah on a wager that reform-based governance will continue after elections in the two countries this year, and that the economies will remain “secular drivers” of emerging-market growth
• Pimco sees opportunities in investment-grade credit issued by some Japanese banks and Australian companies in defensive sectors such as toll roads and regulated utilities