(Bloomberg) — The Bank of Japan may hike interest rates to 1% eventually, heaping pressure on yields to rise in the world’s second-biggest government bond market, according to T. Rowe Price.
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“I’ve had a medium-term belief that they’ll try and get towards 1% if they can,” Arif Husain, chief investment officer of fixed-income, said of the BOJ. “They’re somewhat encouraged by wage discussions and that gives them cover to do so.”
Husain favors so-called flattener trades to express his view — positions that make money should shorter-maturity bond yields rise faster than longer-dated ones. Recent market action and central bank signaling give credence to the bet, with swaps traders pricing a more than 90% chance the BOJ will tighten policy twice by the end of the year.
More immediately, markets are viewing a quarter-point rate hike as a virtual certainty at the conclusion of a two-day meeting Friday — an outlook shared by Husain. That’ll mark another step toward policy normalization in Japan just as traders become more uncertain about the trajectory of peers from the US to Europe.
Japan’s benchmark 10-year yield climbed to 1.255% last week, the highest since 2011. The BOJ’s policy rate is 0.25% now, after it ended its radical monetary easing policy last year, raising rates twice.
“They’ll keep going at their pace,” Husain said of the BOJ’s rate hike path. “And if they have the opportunity, as long as the domestic data supports it, they’ll go a little quicker if they need to.”
Yen View
Husain, a near three-decade markets veteran, warned about the impact of rising Japanese rates in June 2023, when the yen was trading around 140 per dollar. The currency weakened to as low as 161.95 per dollar in July, and is now trading at around the 156 level.
He and his colleagues also beat the consensus in 2022 when the T. Rowe Price Dynamic Global Bond Fund managed to record a gain even as the Federal Reserve hauled up interest rates to tackle sticky inflation.
The yen, still favored as an asset to sell on Japan’s interest-rate gap with the US, may strengthen to multi-year highs should a global shock trigger a stampede for cover, he said.
“I would never rule out 120 or 130,” said Husain. A scenario involving a hawkish BOJ while peers are easing policy could well jolt the yen higher, though “it’s probably a flight-to-quality type of event” that would catapult the currency to such levels, he added. Dollar-yen was last below 130 in March 2023.
