Lily Feng: Hi, everyone. Welcome to today’s Japan Fixed Income Update. Today, we have the great honour of having Tomoya Masanao, managing director, head of Asia-Pacific portfolio management, and co-head of PIMCO Japan, joining us. Tomoya, welcome, and thanks for joining us today.
Text on screen: Tomoya Masanao, Managing Director, Head of Asia Pacific Portfolio Management, Co-Head of Japan
Tomoya Masanao: Thanks for having me.
Lily: This is a very timely update because a lot of our clients have been watching the BOJ, Japan’s fiscal situation, and have been asking questions around how these factors may impact both Japanese and global fixed income markets. So, with that, maybe let’s start with the BOJ.
Text on screen: Lily Feng, Fixed Income Strategist
The Bank of Japan decided to hike its policy rate by 25 basis points at the September policy meeting, and this was done by a 7–2 vote. Was this largely in line with our expectations, and what were the key takeaways?
Tomoya: Broadly speaking, the outcome was in line with our expectations. Some observers suggested that the two dissenting votes made this a “dovish hike”, but we don’t think that’s actually the important point.
The most important takeaway from this BOJ meeting was that the bank recognised that the economy has entered a new phase. Monetary policy now needs to stabilise inflation around the 2% objective, whereas in the previous phase the focus was on raising inflation to 2%.
Text on screen: Japan’s economy has entered a new phase
Tomoya: The BOJ’s policy normalisation is likely to continue, as underlying inflation, in our view, is now around the BOJ’s 2% objective. Also, the intervals between the next rate hikes could be shorter than in the previous phase. Perhaps around three months, or even a bit shorter than that.
Lily: We often read headlines that Japan is running high debt levels, and Prime Minister Takaichi may also have a further expansionary fiscal stance. What is PIMCO’s view? Should investors be concerned?
Tomoya: We are not entirely complacent about Japan’s fiscal situation. Certainly, the country has a lot of debt. Japan’s public debt is very high, well over 200% of GDP on a gross basis. We think the more appropriate way to look at sovereign debt is to subtract the debt securities held in the public-sector balance sheet.
On this net basis, Japan’s debt-to-GDP falls to nearly 130%, which is still high, but at least doesn’t make Japan stand out versus other countries. Unlike many other countries, Japan’s primary balance is almost flat, or neutral, at the moment, suggesting some fiscal room.
Chart on screen: While gross debt is elevated, net debt is in line with peers and improving
Lily: How may some of this expansionary fiscal stance impact monetary policy? What’s our baseline view for the Bank of Japan’s terminal rate?
Tomoya: Our view remains that Japan’s policy rate could ultimately move to somewhere close to 2%, which is fairly priced in at the front end of the Japanese yield curve at the moment. This is based on our base-case view that inflation can stabilise at around 2% in Japan.
The near-term risk still seems to be on the higher side. The Bank of Japan is placing greater emphasis on upside inflation risks, including spillover effects from the Middle East and AI-driven investment demand. The government’s fiscal policy could potentially add further upside risk to inflation.
Lily: We’ve covered quite a bit on the macro side. I want to switch gears to investment implications. How should we look at the Japanese fixed income market in relation to the global fixed income market from a strategic asset-allocation perspective?
Tomoya: We think investors should look at Japan differently today. Japanese bonds are firmly back within the broader global fixed income opportunity set. Japanese government bond yields have moved materially higher, with the 10-year JGB yielding around 3%.
Based on current market levels, an actively managed Japanese fixed income portfolio may provide estimated total carry of around 4%–4.5% in Japanese yen terms. This is without necessarily taking excessive duration or excessive credit risk. For global investors, this could potentially mean 7%–7.5% total carry from Japanese fixed income if portfolios are hedged into U.S. dollars, for example.
Chart on screen: Long-term yields reach their highest levels in three decades
Lily: So, this isn’t just a Japan story?
Tomoya: That’s right. High-quality global fixed income portfolios can potentially offer total carry in the 7%–8% range in today’s market environment, when investors allocate globally and hedge currency exposure back into U.S. dollars or euros.
Lily: So, investors shouldn’t just think about Japan versus global, but rather can potentially gain from owning both.
Tomoya: Japanese fixed income offers relatively high carry for global investors on a currency-hedged basis, while global fixed income offers capital-gain potential, given the high starting level of central-bank policy rates.
Text on screen: Japanese and Global fixed income: Complementary, not substitutes
Lily: Can you walk us through some of the active-management opportunities in Japanese and global fixed income markets, and how we’ve been taking advantage of those? Maybe let’s start with global duration.
Tomoya: Duration looks attractive globally from a valuation perspective, following the repricing in global bond markets. Although there’s a lot of uncertainty, multiple rate hikes are already priced into the front end of the yield curve in many countries, so we see ample risk premium there.
On the fiscal side, we think fiscal deterioration has already been largely priced into the yield curve in many countries. Diversification is always key. We like duration in the United States, Australia and the United Kingdom.
Lily: Noted. And how about the Japanese rates market?
Tomoya: Today, we have a combination of monetary-policy normalisation and large fiscal expansion coming, which can remain a source of the dynamically changing supply-demand mismatch in the Japanese yield curve.
For us, that means focusing less on outright duration calls, whether long duration or short duration, and more on relative-value opportunities, particularly across different parts of the yield curve.
Chart on screen: The rise in rates
Lily: So that’s on the rates side. How about credit and spread sectors?
Tomoya: Corporate credit valuations remain relatively tight across the globe. Tight valuations are supported by resilient economic growth and resulting corporate profits. We remain relatively cautious on generic corporate credit, where the risk-reward does not look compelling. We maintain a higher-quality bias and focus on liquid exposures for portfolio resilience.
As an alternative to generic corporate credit, we still find U.S. agency mortgages and various securitised markets attractive. We favour some attractive Japanese corporate credits and see good relative value in selected municipal or mortgage sectors.
Text on screen: Higher quality, Liquidity, Selective spread sectors
Lily: Tomoya, if there’s one takeaway from today’s session, what would that be?
Tomoya: Fixed income, generally speaking, offers attractive income and diversification benefits, while higher starting yields may create a stronger foundation for future returns. Active management is increasingly important as dispersion among different countries, central banks and sectors will continue to widen.
As Japan enters a new era, Japanese bonds have become attractive as a strategic allocation and present unique active-management opportunities that may enhance potential returns.
Lily: Thank you, Tomoya, for joining us today and sharing your insights. Thank you, everyone, for watching. If you have any questions, please reach out to your PIMCO account manager.
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Program recorded on 1 October 2026.
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