Despite some possible short-term gain for investors, Japan’s bond market is headed for trouble because of its monetary policy, according to an expert panel speaking at an investment conference in Toronto on Monday.
Within the next three years, the Japanese sovereign debt market “is going to implode,” said Christine Hughes, president, chief investment strategist and portfolio manager at Toronto-based OtterWood Capital Management Inc. Currently, Japan’s debt purchasing plan is almost the size of the U.S. plan, said Hughes, despite only being a third of the size of the American economy, and the interest payments on that debt is accelerating.
While an increase in debt payments is concerning on its own, the real problem, according to Hughes, is that Japan’s use of quantitative easing and its inflation target of 2% means that interest rates are going to increase, which will lead to a faster demise of the bond market.
Yet, while the writing may be on the wall in terms of Japan’s debt, there are still opportunities for investors. “We can still have a bull market in the meantime,” says Hughes, “because all these things can sit there by themselves and simmer and they don’t matter until they matter.”
For Eric Bushell, chief investment officer at Toronto-based Signature Global Asset Management, Japan’s decision to use quantitative easing is the Hail Mary strategy that may do more harm than good. Japan’s current monetary policy comes with a risk of policy failure, said Bushell, which means some investors might start looking for the exit sooner rather than later as the central bank loses credibility. “The share of GDP that the monetary basis,” he said, “is looking to move to over the course of the next two years is a little bit of Rodney Dangerfield of monetary easing.”