The trading floor of Joyo Bank Ltd., a major regional lender located an hour outside Tokyo, is under scrutiny as Japanese government bond (JGB) investors watch for signs of renewed domestic bank buying. Joyo Bank, however, is currently holding off on JGB investments, according to Yoshitsugu Toba, a managing executive officer. While Toba anticipates one more interest rate hike by the Bank of Japan (BOJ) in July, he acknowledges the potential for further yield increases if the BOJ raises rates to approximately 1.5% within the next three years.
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Regional Banks’ JGB Appetite Key to Market Dynamics
Market participants are keenly observing whether regional banks in Japan will return to the 10-year JGB market, after yields surged to their highest point since 2009 on Friday. Traditionally, these banks have been significant buyers of 10-year JGBs. However, their holdings diminished as the BOJ implemented aggressive monetary easing measures, including sub-zero interest rates in 2016, to combat deflation. Data from the BOJ reveals a steady decline in JGB ownership by deposit-taking institutions like banks, from over 40% in 2010 to around 11% in recent years.
Joyo Bank Awaits Higher Yields Before Investing
Despite the BOJ’s shift towards raising rates last year, banks remain hesitant to purchase bonds while rates continue their upward trajectory. “We are considering buying JGBs when yields climb further,” Toba stated in an interview. He indicated that substantial JGB investment might not occur until the latter half of Joyo’s three-year medium-term business plan, commencing in April, without specifying a target yield level.
Joyo Bank’s Portfolio and the Impact of US Treasury Purchases
As of December, Joyo Bank’s securities portfolio totaled approximately ¥2.7 trillion ($18 billion), comprising ¥1.58 trillion in domestic bonds and ¥500 billion in foreign debt. Joyo Bank, a member of Mebuki Financial Group Inc., Japan’s fourth-largest regional banking group by assets, exemplifies the trend among Japanese banks of investing in higher-yielding US Treasuries and other foreign bonds during the period of exceptionally low domestic interest rates. However, this strategy backfired when the Federal Reserve’s aggressive rate hikes in 2022 led to soaring dollar funding costs and losses for Japanese banks.
Image depicting the Federal Reserve building
Conclusion: Uncertainty Looms Over JGB Market
The reluctance of regional banks like Joyo Bank to invest in JGBs signals a potential shift in the market dynamics. While the BOJ’s policy direction remains a key factor, the timing and extent of regional banks’ return to the JGB market will significantly influence future yield movements. The interplay between domestic monetary policy and global interest rate trends will continue to shape investment decisions in the Japanese bond market.
