The Zhitong Finance App learned that Ales Koutny, head of international interest rates at Vanguard, said that the market has underestimated the degree of hawkish policy the Bank of Japan needs to adopt this year to boost the struggling yen. His opinion is consistent with Pacific Investment Management (Pacific Investment Management), which is also a bond giant. Both believe that the Bank of Japan will raise interest rates by 75 basis points this year.
Koutny believes that the Bank of Japan's benchmark interest rate will reach 0.75% at the end of the year from the current range of 0% to 0.1%, and will raise interest rates by 25 basis points in June as soon as possible. In stark contrast to this, swap transactions showed that the market only priced additional interest rate hikes before the end of the year at 22 basis points.
In March of this year, Japan finally raised interest rates from a negative range, ending years of negative interest rate policy. However, given the gap in borrowing costs between Japan and the US, the yen then resumed its decline, and the exchange rate of the yen against the US dollar fell to its lowest level in more than 34 years last month. The Japanese government is suspected to have supported the yen through foreign exchange intervention last week.
“We think the market is overpricing the Bank of Japan,” Koutny said in an interview at the company's London office on Wednesday. He believes that the Japanese authorities will be “uneasy” when the USD/JPY exchange rate exceeds 155. “There was endless talk of intervention last week, and we have surpassed that level once again. They understand that only if Japan sends a hawkish enough signal can truly get out of this situation.”
As of press time, the USD/JPY exchange rate is trading around 155.75. The yen exchange rate fell by about 9% this year, making it the worst performer among G10 Group currencies.
Vanguard, which has more than $1.6 trillion in actively managed assets, is betting on rising short-term swap rates and shorted Japanese treasury bond futures in anticipation of the Bank of Japan curtailing quantitative easing. After years of purchasing, the Bank of Japan currently holds more than half of the Japanese government bond market.
Koutny said the agency is also using the yen's recent rise to increase short positions because it believes intervention is fundamentally unworkable. Last week, the Bank of Japan kept interest rates stable at a policy meeting at the end of April, triggering two rounds of suspected intervention, but the exchange rate of the US dollar against the yen fell below 160 points at one point.
He said that only if the global economy slows drastically, prompting Japanese investors to reduce their exposure to overseas assets, will the yen “continue to be bullish” and move towards fair value (Vanguard believes about 1 US dollar to 100 yen). In the short term, if the Bank of Japan starts reducing quantitative easing or raising interest rates, Vanguard will be neutral about the yen exchange rate.
The minutes of the April policy meeting released by the Bank of Japan on Thursday suggest that the pace of interest rate hikes may be accelerated as board members consider the risks posed by inflation and the depreciation of the yen.
On Wednesday, investors' demand for Japan's 10-year treasury bonds was low, reflecting the reluctance of investors to buy treasury bonds when the Bank of Japan is expected to end its debt purchase program and tighten policy again. Despite this, repricing is likely to trigger significant capital inflows from domestic and overseas buyers, which will also help the yen appreciate, Koutny said.
He said, “As long as Japan continues to delay a reassessment of its development path, we will see insufficient demand for bonds. But once properly re-evaluated, we will be very keen to buy Japanese treasury bonds in our portfolio.”