Stephen Jen, CEO of Eurizon SLJ Capital Ltd., forecasts that Japan’s benchmark 10-year bond yield may surge to 2% this year as the Bank of Japan (BOJ) prepares to unwind its ultra-loose monetary policy in response to actions by the Federal Reserve. Jen predicts that the yen will strengthen to 130 per dollar alongside the rise in sovereign bond yields, projecting a range of 1.5% to 2% for 10-year Japanese government bond yields.
Governor Kazuo Ueda’s strategy, according to Jen, will involve recalibrating monetary policy to maintain flexibility while avoiding destabilizing the Japanese Government Bond (JGB) market. This approach reflects Jen’s expertise in currency markets, particularly his “dollar smile” theory regarding the behavior of the US dollar.
Market sentiment has been increasingly hawkish on the BOJ following Ueda’s recent comments indicating growing confidence in achieving the bank’s price targets, a prerequisite for potential policy adjustments. The prospect of rate increases signals Japan’s emergence from a prolonged period of subdued demand.
Jen suggests that due to the fragility of Japanese banks and the public’s familiarity with ultra-low interest rates, the BOJ is likely to adjust its yield-curve-control program rather than tightening policy in response to inflationary pressures. He anticipates a transition from negative rates to a zero interest rate policy, coinciding with the Fed’s rate cuts to maintain stability in the JGB market.
Contrary to Jen’s outlook, Mohit Mittal, Chief Investment Officer of core strategies at Pacific Investment Management Co. (Pimco), believes that the BOJ will gradually adjust its monetary policy, leading to a steady increase in Japanese yields. Pimco has positioned itself with a significant short position in global rates, particularly in Japanese government bonds, reflecting their divergence from inflation trajectories and central bank policies elsewhere.
As Japan navigates potential shifts in monetary policy, market participants will closely monitor developments in bond yields and currency dynamics, influenced by both domestic policy decisions and global economic trends.
