Japan megabanks signal return to JGB buying as yields rise and markets stabilise

Japan’s megabanks see higher yields restoring the appeal of JGBs, even as near-term losses and policy risks argue for a cautious rebuild.In brief, via Reuters report. Summary:Japan’s biggest banks say they are ready to rebuild JGB holdings as higher yields improve returns, despite rising unrealised losses.MUFG and SMFG see long-term yields stabilising, opening the door to cautious re-entry after years of shrinking bond exposure.Recent calm in JGB markets, including resilient auction demand and lower long-end yields, has eased immediate stress.Banks remain wary of further BoJ rate hikes and fiscal risks linked to Prime Minister Takaichi’s policy agenda.Analysts say higher yields and a weaker yen should lift bank earnings momentum over coming years.Japan’s largest banks are preparing to increase their holdings of government bonds as rising interest rates restore the appeal of yields, even as valuation losses on existing portfolios have mounted.Executives at Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group said they expect to rebuild Japanese government bond exposure after years of cutting holdings during the era of ultra-low rates. Over the past decade, returns on JGBs were compressed by aggressive monetary easing from the Bank of Japan, prompting banks to shorten duration or shift assets elsewhere.That dynamic is now changing. A sharp rise in JGB yields since November, triggered in part by fiscal concerns tied to Prime Minister Sanae Takaichi’s spending proposals, hit bond valuations, pushing unrealised losses higher. However, recent weeks have brought signs of stabilisation. Demand at recent debt auctions has been resilient, while 30-year JGB yields have retreated around 32 basis points from January’s record highs.MUFG said it would cautiously rebuild its JGB position as long-term rates show signs of peaking. The bank reported unrealised bond losses of roughly ¥200bn at year-end, up sharply from earlier in the year, but noted that earlier sales of longer-dated bonds helped limit the damage. SMFG echoed that stance, acknowledging valuation losses while signalling plans to gradually increase JGB exposure as market conditions allow.Banks have so far remained focused on short-duration bonds. Mizuho, Japan’s third-largest lender, reported an average remaining maturity of just 1.8 years on its JGB holdings at end-December, underscoring sector-wide caution.Some investors expect banks to wait before adding significant long-dated exposure, given the risk of further BoJ tightening and concerns over Japan’s heavy debt load. Still, analysts argue that higher yields should support earnings over time, especially as net interest margins improve. The rally in bank shares since the BoJ began raising rates in 2024 reflects that optimism, with analysts now revising profit forecasts higher across the sector.
This article was written by Eamonn Sheridan at investinglive.com.

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