In an update titled Challenges Remain for Asia's Economies, Pimco portfolio manager Tadashi Kakuchi said the BoJ cannot rely on a negative interest rate policy going forward, arguing that its “effectiveness will be limited”.
According to Mr Kakuchi, the scope of negative rates will be limited because “deeply negative” rates, such as -1 per cent, would hurt the profitability of regional banks and pose risks to the Japanese financial system.
As a result, Mr Kakuchi said the BoJ is likely to implement a mix of easing measures going forward. These include a combination of lowering rates, accelerating monetary base expansion and changing the quality of assets purchased by the central bank.
“On the fiscal side, expansionary policy is likely in the coming year, supporting the growth trajectory,” he said.
Mr Kakuchi expects trend-like GDP growth of 0.25 per cent to 0.75 per cent in Japan for the 2016 calendar year.
He noted that currency hedging will persist on the back of the BoJ’s negative rate policy.
“The ongoing trend for Japanese financial institutions to shift assets offshore with currency hedging will likely accelerate... which will keep demand from Japanese investors to borrow US dollars high.”
“We expect continuing dislocations in the US dollar/yen cross-currency basis market. This would provide opportunities to create synthetic US dollar short-term assets via three month Japan T-bills, hedged back to the US dollar, generating potentially attractive spreads over US treasury bills.”
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