(Bloomberg) -- Pacific Investment Management Co. expects the Bank of Japan to raise interest rates two more times this year, boosting future returns on the nation’s government bonds.

The BOJ will raise the policy rate to 0.25% in July or September, to 0.5% in December or next January, and to 1% during 2025, according to Tomoya Masanao, co-head of Japan and Asia-Pacific portfolio management at Pimco. He expects the yield on the five-year JGB to be around 0.9% at the end of 2024 and the yield on the 10-year JGB to be around 1.25%.

For a decade, the BOJ kept interest rates and volatility low, making the country’s debt an unattractive investment. With the higher rates, JGBs will gain and active managers will also be able to boost performance by trading, according to Masanao. 

“It will be a good opportunity for investors to return to the Japanese bond market,” he said. “There is no doubt that this will become a very important market.” 

Masanao, who has three decades of experience in the yen interest rate market, said there are “investment opportunities where there are inefficiencies” in Japan’s bond markets. That includes the market’s “fragmentation,” with banks focused on medium- to long-term bonds and insurers targeting ultra-long-term debt such as 30-year notes. The fact that the BOJ holds half of JGBs also distorts the market, he said.

The BOJ began moving away from its ultra-easy monetary policy by raising interest rates for the first time in 17 years in March. It is widely expected to indicate a policy of reducing its large-scale JGB purchases at its June 14 monetary policy meeting.

Masanao will also be watching whether the BOJ’s monetary policy will be affected by the exchange rate in the future. While the yen’s depreciation has benefited exporters, it has had a negative impact on households. 

“The BOJ will no longer be able to say that exchange rates are outside its jurisdiction,” he said. As the relationship between monetary policy and exchange rates strengthens, “a global perspective will become more necessary to generate excess earnings,” he said.


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