In 2023, the “Mother of All Pivots” will prompt major Asia funds to consider the yen

When the final anchor to the world of ultra-low interest rates takes off, according to one of Asia’s top bond funds, investors should seek the yen as their “primary vehicle.”

“If you’re talking about pivots, this is the mother of all pivots,” when the Bank of Japan decides to alter its monetary policy, according to Omar Slim, a money manager at PineBridge Investments. “The way that the market will respond to this, the obvious one, will be the potential appreciation of the yen.”

The yen has increased more than 11% from its low point in October due to government assistance, expectations for a pause in rate increases in the United States, and speculation about a possible change in policy from the BOJ sometime in 2019. In addition, Wednesday saw a rise in the likelihood of such a change as a consequence of a report that authorities were investigating the possibility of a policy review in 2023, which has historically been a precursor to policy changes.

According to Slim, the yen appears to be under defense by the authorities at roughly ¥145 to the dollar, and “it seems that the sweet place for them, at least at this juncture, looks to be the ¥120, ¥130 sort of level.

On Thursday, the exchange rate was close to ¥135.50.
Investors have started creating scenarios for surrendering the last dove among the big central banks, which can devastate everything from bonds to equities. Furthermore, Slim does not see a significant spillover to Treasurys, despite some analysts’ predictions that a BOJ lift-off may result in higher bond yields globally.

“The story around the Fed is so strong that it’s going to overwhelm what other safe-haven bond markets do,” he further stated.

Slim joins Fidelity International and T. Rowe Price in liking the yen after it was battered to a three-decade low of ¥151.95 per dollar this year. In addition, Slim helps manage PineBridge’s Asia Pacific Investment Grade Bond Fund, which has outperformed rivals by 92% over the previous five years.

The Singapore-based fund manager believes that the BOJ may tweak its policy using various tools, including lowering the amount it spends on purchasing government bonds and exchange-traded funds to boost the economy and letting the benchmark yield cap fluctuate.

To avoid “doing a lot of harm to pension plans, to banks’ balance sheets, to insurance balance sheets, and so on,” he added, policymakers would have to control the process.

Slim has a negative view of Japanese bonds, whose yields have remained deceptively low for years to maintain borrowing costs as low as possible.

He stated, “To be positive on JGBs would take a lot of guts from anyone here.”