Pimco sees Japan wooing capital as tariffs spur diversification

[SINGAPORE] Japan has emerged as a prime destination for global investors as the trade war triggers a reassessment of capital flows into the US, according to Pacific Investment Management Co (Pimco).

The Asian nation is drawing inflows that seek to benefit from “once-in-a-generation structural reforms” in equities and rising rates in fixed income after decades of monetary stimulus, according to Ben Ferguson, co-head of Pimco in Japan. US President Donald Trump’s policy announcements have been “disruptive” and the latest tariff announcements “highlight the need to, at least consider diversification”, he added.

“Japan historically has not been a focus as an investment opportunity for global investors, but this is one of the most dynamic moments that we have seen in this economy for the better part of the last three decades,” Ferguson, a former Goldman Sachs banker who joined Pimco in 2023, said. “Japan has moved towards the top of mind for global allocators.”

A worldwide backlash against Trump’s trade war is accelerating the hunt for alternatives to US assets, and Japan, with its multi-trillion dollar bond and equity markets, has become a favoured bet. Global funds have continued to scoop up Japanese assets after buying a record 9.2 trillion yen (S$81 billion) of stocks and bonds in April, according to government data.

There are, of course, risks to the outlook. The US has slapped a 25 per cent tariff on Japan’s shipments that will come into effect on Aug 1, with the nation also subject to a levy on cars and auto parts as well as a tariff on steel and aluminium. As the deadline approaches, both Tokyo and Washington are facing growing pressure to strike a deal.

“There’s a rationale there, which is Japan geopolitically is one of the most – if not the most – important relationship to the United States,” said Ferguson, citing the US’ significant military presence in the country. “Both sides have an incentive to make sure that this specific trade issue does reach a resolution.”

Investment opportunities

Pimco, which oversees more than US$2 trillion, expects investors to plough more money into the world’s third-biggest bond market as it’s an “attractive investment diversification from a large Treasury allocation, especially when swapped into the US dollar,” according to Ferguson.

A degree of calm has returned to Japan’s bond market after authorities trimmed sales of longer-dated debt to allay jitters sparked by the reduction of the central bank’s purchases. A sale of 20-year government bonds proceeded smoothly on Thursday (Jul 10), with the bid-to-cover ratio for the offering rising to the highest level since March.

“What we saw over the last few months may be the high end of the range of volatility in the market,” Ferguson said. “We think the relative value, particularly at the long end, is attractive.”

At the asset management industry level, Ferguson is keen to tap into opportunities to help invest the more than US$7 trillion of domestic savings accumulated by Japanese households, which is among the biggest pool of such capital in the world.

If this stockpile of cash is not recycled back into the economy, it may hamper corporations’ ability to make fresh investments, weigh on productivity and hurt Japan’s ambitions for sustainable price growth.

“If you think about national resources on a global scale, Saudi Arabia has oil, Japan has savings,” Ferguson said. “You can be savings-rich, but if everyone else is outgrowing you and those savings are not deployed to drive economic activity and growth, you actually end up becoming poorer. It’s a headwind for the economy.” BLOOMBERG