Bank of Yokohama Ltd., Japan’s largest regional lender, is prepared to pile back into the domestic debt market when the central bank’s peak interest rate is in sight.
The Bank of Japan looks set to stand pat on policy this month, though there’s a “good chance” of it raising interest rates in either December or January to 0.75%, according to Hitoshi Inoue, an executive officer who heads the lender’s markets business. For now, the bank plans to stay cautious on Japanese government bonds, he said.
His main scenario is for the BOJ’s rate to peak at 1.25% after an additional hike in the fiscal year starting April 2026 and another the following year. The BOJ moves would likely lift the 10-year Japanese government bond yield to around 2%, Inoue said. The benchmark rate was at 1.65% in Tokyo on Wednesday.
After Japanese banks “struggled” for years as rock-bottom interest rates sharply curtailed lending margins, “it’s the total opposite now,” Inoue said in an interview. “In a world with interest rates, our core portfolio will be made up of sovereign bonds and Japanese and US stock index investments.”
Market participants are watching whether commercial banks will get back into government debt as the BOJ, still by far the biggest holder of JGBs, reduces purchases as part of its exit from monetary stimulus.
Japanese banks including Yokohama had loaded up on foreign bonds and other assets to make up for diminishing returns from domestic debt after the BOJ started radical monetary easing in 2013. Market players are also keeping a close eye on whether Japanese investors will unload those overseas assets to bring funds home.
Bank of Yokohama, named after the port city near Tokyo where it’s based, is the core unit of Yokohama Financial Group Inc. The banking group had a securities portfolio of about ¥2.1 trillion at the end of June, excluding assets it has set aside to hold to maturity. About half of the holdings are JGBs and other yen bonds.
In its fiscal first half ended in September, the bank started buying “some amounts” of JGBs, mainly two-year and five-year notes, according to Inoue, who said the yields on these securities have become attractive. Two-year JGB yields have climbed about 33 basis points this year to around 0.935% while five-year yields have risen around 48 basis points to 1.225%.
When the timing is right, the bank will mostly purchase short- and medium-tenor notes to match its liabilities, which are largely made up of relatively short-term customer deposits, he said. The bank will keep its current investment stance in the second half through March 2026, Inoue said.
If inflation and economic conditions pan out as the BOJ projects and the central bank’s policy rate reaches its expected highest level, the Yokohama lender will “go full throttle” to buy JGBs, the banker said.
Inoue joined Bank of Yokohama in 1997 and became the executive in charge of markets in April this year.
The lender traces its history back to 1920, when financial difficulties at a major bank in the city prompted the Yokohama business community to ask the government to establish a new lender to rescue depositors and stabilize the local economy, according to its website.
Going forward, even if the bank starts a major shift into JGBs, it will keep some US Treasuries in its books as safe assets, Inoue said.
Right now dollar-funding costs are elevated for Japanese investors, and the bank is buying Treasuries mostly for short-term capital gains, according to the executive.
The bank will also keep the scale of its collateralized loan obligations holdings steady. CLOs are “good buy-and-hold assets with solid returns,” he said.
This article was generated from an automated news agency feed without modifications to text.
