Vanguard Group warns Japan’s neutral interest rate is underestimated, recommends underweighting Japanese bonds

On December 5, trillion-dollar asset management giant Vanguard Group issued a warning that the market is severely underestimating Japan’s neutral interest rate level. The group’s global head of rates, Harlem, stated that the Bank of Japan needs a higher rate than the market expects to effectively curb inflation, and anticipates the central bank will continue to raise rates at its December 19 meeting.

Currently, Japan’s policy rate is 0.5%, while the neutral rate is estimated to be between 1% and 2.5%. Vanguard Group recommends investors underweight Japanese short-term government bonds, believing that underweighting Japanese bonds at the short end of the yield curve is the correct strategy to manage risk.