Business

BOJ easing seen as blunt tool by one fund, blowing bubbles by another

by Kevin Buckland and Shigeki Nozawa

Bloomberg

TCW Group Inc. says the Bank of Japan has made a mistake and should exit quantitative easing as soon as possible. Invesco Ltd. says the only error was not starting sooner.

The split in views at the funds, which manage a combined $971 billion, comes as BOJ Gov. Haruhiko Kuroda kept monetary policy unchanged Thursday and his board said inflation expectations seem to be rising. TCW is among critics that say easing has only served to artificially inflate asset prices above what is merited by the real economy, and the longer it continues, the bigger the eventual crash. TCW recommends buying sovereign debt as a haven, while Invesco says sell.

Aggravating the divergence are mixed signals from an economy that slumped into its second recession in less than two years last quarter, even as unemployment hovers near an 18-year low.

Kuroda has said monetary policy is having the intended effect, while stressing that companies need to increase wages in line with the record profits that have resulted from a weaker yen. Economists say the government also needs to pull its weight.

“The BOJ’s QE isn’t a mistake, but the problem is that the government is tightening fiscal health by cutting spending and raising taxes, offsetting any benefits,” said Yutaka Ban, senior credit analyst at SMBC Nikko Securities Inc. in Tokyo. “People will criticize QE for only creating bubbles, and we will see the end of it. That is the worst-case scenario, but it may be the most likely one.”

Economists are virtually unanimous in saying the monetary authority won’t be able to achieve 2 percent inflation within its target period, even after extending it by six months on Oct. 30 to the period in or around October 2016 to March 2017. An increasing number of analysts also forecast the central bank is done with expanding stimulus.

While workers’ pay grew for seven consecutive months through September, the increase has averaged only about 0.3 percent over that time. BOJ board member Yutaka Harada has said 3 percent wage inflation is required to achieve its price goal.

“When asset prices rise excessively relative to income or gross domestic product, that seems to be the situation that causes financial instability,” said Tad Rivelle, chief investment officer at TCW, who replaced Jeffrey Gundlach at the firm in 2009. “Once you create the leverage, and once you create the bad resource allocation, there’s no easy way out. The choice is have a recession and a bear market now, or have a worse recession and a worse bear market later.”

The Topix stock index has more than doubled in the three years since Prime Minister Shinzo Abe mounted his leadership bid with a pledge to implement massive monetary stimulus to correct excessive strength in the yen. The currency has plunged 34 percent over the period, while bond yields on maturities as long as five years turned negative.

Rivelle recommends sovereign debt because it’s one asset class where he’s not concerned about a “crash,” despite Japan having yields close to zero. The yield on 10-year Japanese government bonds was 0.3 percent Friday in Tokyo, while the two-year security yielded minus 0.025 percent.

TCW’s view clashes with that of Invesco’s head of multi-sector fixed income, Rob Waldner, who sees “clear” signs that the BOJ’s stimulus is working.

“Whether it comes through the asset markets or the currency or however it comes, it’s still been effective in helping to stabilize price pressures,” he said in an interview in Tokyo on Wednesday. “It’s a blunt tool, but it’s had a positive impact. The Japanese should have moved sooner.”

Waldner’s optimism on the economy means he’s avoiding government bonds.

“This is the investment proposition for a government-bond investor: You give me your money, and I give you back less in real terms,” he said. “The first thing we’re recommending people do is sell their sovereign debt.”

The split in views over the effectiveness of QE is mirrored by a divergence in the consumer-price data itself. While the BOJ’s main measure of inflation — which strips out fresh food and the effects of last year’s sales tax increase — has dropped back below zero since August, another measure— which also removes energy costs — has jumped to 1.2 percent in September from 0.4 percent in January.

The Invesco Core Plus Bond Fund has returned 0.7 percent this year, beating about 80 percent of its peers, according to data compiled by Bloomberg. TCW’s Metropolitan West Total Return Bond Fund is up less than 0.1 percent, putting it in the bottom 40 percent. Over a three-year horizon, both funds are within the top 15 percent.

Where they also converge is on the outlook for JGBs. Invesco sees the 10-year note yield in a range from 0.3 percent to 0.5 percent next year, while TCW expects the securities to trade “mostly sideways” compared to current levels.

“Sovereign bonds in Japan are already at extreme levels, and yet they survive,” said TCW’s Rivelle. “Japan seems to be OK with it.”