"Going against market expectations"! Several asset management giants continue to bet that the Bank of Japan will raise interest rates again

According to the Zhitong Finance and Economics APP, a few well-known investors are still betting that Japan will further raise interest rates in the coming months, despite a significant downward revision in market expectations for further policy tightening in Japan after a recent round of selling. The world's second-largest asset management company, Vanguard, has doubled its short interest in Japanese government bonds as it still believes that the Bank of Japan may raise rates by another 50 basis points before December. The prospect of another rate hike has also prompted M&G Investment Management to continue increasing its short positions in Japanese government bonds while increasing its holdings in the yen. RBC BlueBay Asset Management continues to sell Japanese 10-year sovereign bonds. These positions are inconsistent with the overnight swap market trends. Based on the trends in the overnight swap market, the likelihood of the Bank of Japan raising rates by 0.25% before the end of the year is around 34%, lower than the approximately 63% at the beginning of this month. Their views also sharply contrast with institutions such as AllianceBernstein, which stated that unless the yen weakens to above 160 against the US dollar, it will be difficult for the Bank of Japan to raise rates further in 2024. However, if the above three institutions are proven correct, the tightening policy may stimulate further appreciation of the yen, while Japanese government bond yields will continue to gradually rise. Although Bank of Japan Governor Haruhiko Kuroda had indicated on July 31 that rates may continue to rise after the hike that day, expectations for further tightening were quickly lowered. A series of weak US data triggered a wave of selling in high-risk investments, including yen-funded arbitrage trades. Comments from Bank of Japan Deputy Governor Masayoshi Amamiya suggested that policymakers would avoid raising rates when the market is unstable, which many investors interpreted as a dovish signal. Subsequently, the power struggle within Japan's ruling party further cast a shadow over the prospects for a recent rate hike. The sharp reversal in rate hike expectations led to a significant drop in the 10-year Japanese government bond yields this month. However, Mark Dowding, Chief Investment Officer at BlueBay and a long-time bear on Japanese government bonds, is still seeking to increase his bearish bets on this maturity bond, anticipating another rate hike by the Bank of Japan. "In recent weeks, trading in Japan has cost us," he said, but "we have not been forced to close positions." Dowding stated, "Data and news support our argument. Therefore, this tells us that we want to maintain patience with this position." He expects the next rate hike to be in January next year. Vanguard's International Rates Manager Ales Koutny shares a similar view with BlueBay and has re-increased its short interest in Japanese government bonds. The asset management company has been reducing its holdings of Japanese government bonds as it believes the Bank of Japan will need to raise rates faster than expected Koutny said, "Some people think that Shinichi Uchida's remarks mean that the Bank of Japan will not raise interest rates again, but I think this is a reassurance to the market." He added that after Japan ended decades of struggling with price stability and deflation, wage increases could boost the domestic economy and open the door to raising interest rates up to two more times this year. However, Koutny acknowledged that the Bank of Japan may postpone rate hikes during periods of market instability. As these three investment firms bet on short-term Japanese government bond yield increases, they have started engaging in curve flattening trades, buying 30-year or longer-dated bonds because they believe that the 10-year government bond yield is still too low at current levels. M&G also continues to increase its holdings in the Japanese yen. Eva Sun Wai, fund manager at M&G, said, "We believe that the Bank of Japan's stance may be more hawkish than the market hopes for. I wouldn't be surprised if we see another slight rate hike before the end of the year."