How active management can help to maximise returns

Fixed income investing under Abenomics

In an environment of historically low Japanese government bond yields under Abenomics, Keisuke Tsumoto, Head of Japanese Fixed Income for Manulife Asset Management, believes that pursuing an active investment approach with multiple sources of potential return is key to maximising risk-adjusted returns.

Abenomics, Prime Minister Shinzo Abe’s ambitious economic stimulus policy aimed at revitalizing the Japanese economy by achieving sustainable growth and stable inflation, has seen the Bank of Japan (BoJ) implement unprecedented qualitative and quantitative monetary policy easing. The injection of US$960 billion1 into Japanese capital markets since April 2013 has so far spurred a jump in inflation to the current 1.4%2 and has left virtually no asset class untouched.

Japanese capital market dynamics under Abenomics

The scale of the quantitative and qualitative monetary easing implemented by the BoJ in April 2013 exceeded market expectations. Equity markets climbed to new highs and the Japanese bond market entered a period of turmoil, with prices fluctuating violently. Bond market conditions did not normalise until June 2014, by which time the new monetary policy had been largely priced in and the 10-year JGB yield had stabilised at around 0.8%3.

“By this time market consensus was that qualitative and quantitative monetary easing would keep Japanese Government Bond (JGB) yields low and credit spreads narrow for an extended period of time,” explains Tsumoto. “In this low-yield environment, we feel that active portfolio management that exploits multiple sources of potential return and multiple investment approaches is the key to achieving sustainable attractive returns on Japanese fixed income.

1 Bank of Japan, June 2014.
2 Nationwide CPI ex-food and ex-effect of consumption tax hike, Statistics Bureau, Ministry of International Affairs and Communications and Bank of Japan, May 2014
3 Bloomberg.

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