Pacific Investment Management Co. is a house divided on whether the Bank of Japan stepping away from its yield-curve control policy will rattle or merely ripple through global markets.
(Bloomberg) — Pacific Investment Management Co. is a house divided on whether the Bank of Japan stepping away from its yield-curve control policy will rattle or merely ripple through global markets.
“If you want start an argument at Pimco this is a pretty good topic,” said Andrew Balls, the asset manager’s chief investment officer for global fixed income, of the linchpin of the central bank’s ultra-loose monetary policy.
“Some of us — and I would be in this camp — think that the the BOJ move is very well telegraphed,” and therefore less likely to stir up turmoil, he told Bloomberg Television Friday. “It’s expected that they will move away from the control over time.”
Another camp sees a more far-reaching effect on global markets, and “this is often people who are working on the hedge fund side of the equation, where there is real sensitivity to the spillover effects from the BOJ move,” said Balls.
Investors have been expecting the BOJ to further ease its control of the yield curve this year, especially with the new head at the central bank. But Japanese authorities have stayed put after they widened the YCC range in December.
Officials at the central bank are seeing little urgent need to address the side effects of their yield-curve control at this moment, according to a report earlier Friday. The yen was the worst performing currency among Group-of-10 rivals, dropping more than 1% against the dollar after the report. The BOJ’s dovish stance — in contrast to the hawkish views in the US and Europe — has also helped make the yen the biggest laggard this year with the currency weakening by more than 7%.
Read more: BOJ Is Said to See Little Need to Act on Yield Control for Now
“Compared with the rate shocks we’ve seen in terms of the Federal Reserve, the European Central Bank, et cetera, et cetera, it’s hard to see why this should be such a big impact in terms of global markets,” said Balls.
Here’s what Balls had to say about the US market:
- “The most likely outcome is a recession, but there has been promising signs in the data, so you could certainly have a slowdown, but without the formal recession”
- “There is very clear indication that the Federal Reserve will hike rates next week and they may well go again after that”
- Expectations for the Fed to start cutting rates next year looks reasonable but sees two risks to this baseline view: inflation stickiness and on the flipside, a weaker-than-expected economy
–With assistance from Jonathan Ferro.
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