Pimco is buying yen, betting the Bank of Japan will be forced to tighten monetary policy as inflation accelerates.
Pimco fund manager Emmanuel Sharef said the bond giant began building a long yen position a few months ago after the yen fell below 140 yen to the dollar.
“As we continue to see Japanese inflation rise and stabilize above their target, they will want to move in the direction of abandoning or changing their yield curve control policy, which may ultimately Interest rates need to be raised.”
“Inflation in the U.S. is falling and inflation in Japan remains high. In our framework, this naturally requires the creation of long yen positions,” he said.
The yen has fallen more than 12% against the dollar this year, disappointing many on Wall Street who had predicted gains amid a reversal from the hawkish Federal Reserve and dovish Bank of Japan. While that has not happened so far, economists have been predicting in recent months when the Bank of Japan would begin to “normalize” policy.
The yen fell to 151.91 yen per dollar last week, just shy of the 30-year low set in October 2022 and the worst performer among G10 currencies this year. Although the Bank of Japan has loosened its grip on the yield curve, it has not been able to prevent the yen from falling.
“I can’t predict exactly what actions they will take, but it will be necessary to continue to tighten policy in some form,” Sharef said.
He predicts that the Bank of Japan may adopt more gradual additional easing measures, which may also take the form of abandoning yield curve control, and then may eventually raise interest rates.
Another possible way to support the yen may be government intervention. That speculation is growing as the yen falls below the 150 level, where the authorities entered the market last October.
In September, Japan’s inflation rate fell below 3% for the first time in more than a year, confirming the Bank of Japan’s view that upward price pressure has peaked. Still, the figure was stronger than economists’ consensus forecast of 2.7%.
Another PIMCO manager, former Fed Vice Chairman Richard Clarida, said last month that the Bank of Japan may cancel its yield curve control program by the end of the year if inflation is worse than expected. He pointed out in a research report that the Bank of Japan may also increase the short-term policy interest rate from the current negative 0.1% to 0% early next year.