Vanguard Joins Pimco in Seeing More BOJ Hikes Than Market
(Bloomberg) -- Vanguard Group Inc.’s Ales Koutny says the market is underestimating just how hawkish the Bank of Japan will need to be this year to boost the beleaguered yen.
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The asset manager’s head of international rates sees the central bank’s benchmark reaching 0.75% by year-end, from a range of 0% to 0.1% now, with a quarter-point hike as soon as June. In contrast, the market has priced in just 21 basis points of additional hikes by the end of the year, swaps indicate.
His view aligns with that of fellow bond giant Pacific Investment Management Co., which also sees three quarter-point hikes in the cards this year. Goldman Sachs Group Inc. economists, meanwhile, expect rate increases to as high as 1.5% by 2027.
Japan finally raised interest rates out of negative territory in March. But the yen subsequently resumed its decline, tumbling to its weakest in more than three decades against the dollar last month given the chasm between Japanese and US borrowing costs. Japan’s government likely responded to the slide by intervening in the foreign-exchange market last week to support its currency.
“We think markets are underpricing the BOJ,” Koutny said in an interview on Wednesday at the firm’s London offices, arguing that authorities will be “uncomfortable” with a dollar-yen rate above 155. “For all the noise last week about intervention, we are already above that again. They understand that the only way to really get out of that is for Japan to send a fairly hawkish message.”
The pair traded around 155.70 on Friday in London. That leaves the yen down about 9% this year versus the dollar, the worst performance among Group-of-10 currencies.
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Vanguard, which has over $1.6 trillion in actively managed assets, is betting on higher short-term swap rates and is short Japanese government bond futures given expectations for the BOJ to taper its quantitative easing. The BOJ owns more than half of the nation’s government bond market after years of buying.
The firm also used the yen’s recent rally to increase its short position on the view that intervention fundamentally doesn’t work, Koutny said. The yen plunged through 160 last week after the BOJ held rates steady at its late-April meeting, triggering two suspected rounds of intervention.
The currency will only manage a “continuous bullish move” toward fair value — which Vanguard sees around 100 per dollar — if the global economy sees a significant slowdown, prompting Japanese investors to reduce their foreign asset exposure, he said. In the short-term, the firm would turn neutral on the yen if the BOJ starts to reduce QE or hikes rates.
A Bank of America survey published Friday showed more than half of respondents see the pair heading back to 160 or higher as a result of intervention. Just under one third see it stabilizing at around 155, while none foresee a reversal to 150.
A summary released Thursday of the BOJ’s April policy meeting hinted at the possibility of faster rate hikes, as board members considered the risks posed by inflation and the yen’s depreciation.
Goldman Sachs sees rate increases of 25 basis points semi-annually until the policy rate’s target range reaches levels between 1.25% and 1.5% in 2027, although the timings of hikes are uncertain and depend on economic and inflation trends, economists including Tomohiro Ota wrote in note dated Thursday.
A sale of Japanese 10-year government notes drew tepid investor demand on Wednesday, reflecting a reluctance to buy given the risk of a selloff with the BOJ projected to end its bond-buying program and tighten again. Still, that repricing would likely trigger a flood of inflows from both domestic and overseas buyers, which would also help the yen, Vanguard’s Koutny said.
“As long as Japan keeps delaying the reassessment of its path, we’re going to see a lack of demand for the bonds,” he said. “But once that proper reassessment happens, we would be quite keen to buy JGBs for our portfolios.”
--With assistance from Yumi Teso.
(Updates prices, adds Bank of America survey in paragraph 10.)
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