Given PIMCO’s expectations for higher inflation, do inflation-linked bonds offer value?
Masanao: Over the secular timeframe, we believe inflation-linked bonds in Japan are attractive versus nominal bonds. Linkers are pricing in a breakeven inflation rate of about 0.6% at the moment, which we find very attractive on a secular basis. Although we are not expecting inflation to rise substantially, still think the current breakeven priced into linkers is low and the downside of owning linkers versus nominal bonds is limited at that breakeven rate. Other factors also support the case for JGB linkers. One is the expected consumption tax hike. The consumption tax currently is 5%, which is substantially lower than in other developed countries. Thus, the consumption tax needs to rise and we think it is going to be higher in our secular horizon. Given Japan’s fiscal position, the consumption tax is one of the sources that need to contribute to restoring the fiscal situation, and we think political discussion of the consumption tax will heat up after the July election. The last hike
