“In the world we are in, QE is where we are at. Some people insist they will change that but my suspicion is probably not,” Hull said. “That being said, Japan’s adoption of a negative interest rate policy back in January was not expected so there are potentials for an unexpected outcome.”
Striking the right balance between monetary and fiscal policy is not just a problem the BoJ is grappling with but something that remains a complication for the central banks of most developed economies.
“Globally we are at stage where Plan A hasn’t worked so we have to ask ourselves what is Plan B?,” Hull continued. “However, because Japan has travelled down the QE road significantly further for longer, there have been added expectations that we might see more helicopter money directed to consumers and tax rebates.” But Hull thinks the possibility of that is “probably less rather than more likely,” which could be a further disappointment to the market.
However, Nomura Global Dynamic Bond manager Dickie Hodges stands by his conviction that there are great opportunities to generate returns in the Japanese convertible bond space. Unlike Lonergan, he expects the BoJ will have to cut rates to a more negative position, which coupled with a likely Fed rate hike, will lead to a Nikkei market rally.
“There are only a few places in the world where you see still see double digit negative returns year-to-date in equity markets: the FTSE MIB in Italy and the Nikkei in Japan,” said Hodges. “So even if there is another fall in equity markets as a result of a Fed rate raise later in the year, I think the Nikkei will be less affected than other indices. Furthermore, I believe the BoJ will have to do more QE and cut rates more negative, which will also serve to stimulate risky assets.”
Hodges’ fund has currently got about 7-8% in Japanese Yen convertibles and he will be increasing that more to around 15%, he said. “We will also be buying convertible bonds that are more sensitive to changes in the Japanese Nikkei because I expect it will rally and therefore these bonds will rally more.”
