The Japanese government is considering a plan to push the nation's banks to buy more government bonds as the central bank steps back. The lenders themselves may be less enthusiastic, analysts say.
"I doubt they [banks] would take over the role of purchasing such amount of [Japanese government bonds] from the Bank of Japan (BOJ) as interest rates are on an upward trend," said Toyoki Sameshima, a senior analyst at SBI Securities Co. "They want to avoid facing interest rate risks."
Japan's central bank is the biggest holder of Japanese government bonds (JGBs). At the end of March, it held 47.4% of all outstanding bonds, worth about ￥1,224 trillion, including treasury discount bills, according to data from the BOJ. Banks owned 13.5% of the total, while insurers held 16.3%. Bank ownership of JGBs as of March-end was down sharply from about 42% at the end of 2012.
A working group at Japan's Ministry of Finance has been discussing whether banks could become major buyers of JGBs instead of the BOJ, according to minutes of the discussions published June 21. The discussions came a week after the central bank announced it would reduce JGB purchases, with specifics to be disclosed later. In late July, the policy rate was raised to 0.25% from a range of 0% to 0.1%. The central bank said it would halve its monthly JGB purchases to about ￥3 trillion by the first three months of 2026.
The BOJ is widely expected to raise rates further once it confirms a virtuous cycle of wage increase and inflation.
Rising rates, yields
While bond yields have picked up, banks will likely wait for yields to rise further before aggressively purchasing JGBs, analysts said.
Economists forecast the central bank to raise the short-term rates to 0.5% by the end of 2024 and to 0.75% to 1.0% by the middle of 2025, putting upward pressure on the 10-year yields. Long-term yields surged to a 12-year high of 1.076% on July 31 — when the BOJ tightened its monetary stance — before clocking in at 0.878% on Sept. 12.
"[The banks] will probably increase their JGB portfolios to some extent as they want to take higher yields," said Tomoaki Kawasaki, an analyst at IwaiCosmo Securities. "But they want to avoid taking interest rate risks."
Kawasaki and Sameshima agree that banks would wait for the 10-year yields to rise above 1.0% and stay at such a level before they snap up JGBs.
Japan's megabanks tend to seek capital gains from higher bond prices through their trades, while local lenders favor an income gain from higher yields by holding JGBs to maturity, Sameshima added. Yields move inversely to bond prices. A capital gain is the profit from selling bonds, while an income gain is made from a coupon rate on bonds.
Banks face challenges in boosting their JGB holdings as financial regulations require them to keep their interest rate risk below a certain level. As such, their additional JGB purchases would be "limited," according to a Mitsubishi UFJ Bank report used for discussions at the panel of the finance ministry for JGB issuance. Overall Japanese banks could take over about 30% of the BOJ's role of digesting JGBs, the report added.
Mitsubishi UFJ Financial Group Inc. (MUFG) reduced its JGB holdings to ￥31.4 trillion on June 30 from ￥35.9 trillion a year ago. Sumitomo Mitsui Financial Group Inc. (SFMG) increased its sovereign bond holdings to ￥8.6 trillion from ￥7.5 trillion, while Mizuho Financial Group Inc.'s JGBs holdings shrank to ￥13.5 trillion from ￥11.4 trillion, according to company statements.
"There is a great possibility that the economic and inflationary conditions will likely continue as the Bank of Japan forecasts," a spokesperson at MUFG said in an email, adding that the bank sees a significant chance for the policy rate be raised to 0.5% by December or January 2025.
"Given the current interest rates level, we won't make a full-fledged restoration of our JGB holdings, and we will manage our positions in a way that increases our resilience to rising interest rates," the spokesperson added. Spokespeople at SMFG and Mizuho declined to comment.
The finance ministry's panel is also reviewing a maturity of JGBs for a new issuance as major banks have shortened the duration of their holdings.
MUFG shortened the average remaining duration of its JGB holdings to 1.1 years in June from 1.5 years in March 2023, and SMFG reduced it to 1.8 years from 2.4 years. Mizuho cut the average remaining duration of its holdings to 4.8 months from 8.4 months, company statements show. Shortening the duration means reducing susceptibility to market fluctuations.
"It would be necessary to reduce interest rate risks by shortening the maturity of bonds and to explore an issuance of floating-rate government bonds," according to the minutes issued by the panel in June.
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