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(Bloomberg) -- A trading room about an hour’s train ride from Tokyo is on the radar of Japanese government bond investors waiting to see whether domestic banks will resume buying the nation’s debt in earnest.
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Joyo Bank Ltd., one of Japan’s largest regional lenders, is holding off from investing in domestic bonds for now though, according to Yoshitsugu Toba, a managing executive officer at the bank. While his main scenario is for the Bank of Japan to lift interest rates just one more time in July, he also sees the risk that debt yields will climb even further if the BOJ raises rates to around 1.5% at most in about three years.
There’s keen interest in the market on whether Japan’s regional banks will pour back into benchmark 10-year notes, whose yields jumped to the highest levels since 2009 in Tokyo trading on Friday.
Those lenders have traditionally been some of the biggest buyers of JGBs that are due in a decade. But they cut their holdings as the BOJ embarked on radical monetary easing to try to drag the economy out of deflation, including pushing interest rates below zero in 2016. Deposit-taking institutions such as banks held more than 40% of Japanese government debt in 2010 but that dropped steadily, to around 11% in the past couple years, BOJ data show.
The central bank has shifted to raising rates since last year, but lenders are reluctant to buy bonds while rates still appear to be headed higher.
“We are thinking about buying JGBs when yields climb more,” said Toba, who heads the market team at Joyo, in an interview. Toba said full-scale investment in the securities may not happen until around the latter part of its three-year medium-term business plan period that starts in April. He didn’t specify a level for when the bank would start buying.
Joyo’s securities portfolio stood at about ¥2.7 trillion ($18 billion) as of December, including ¥1.58 trillion in domestic bonds and ¥500 billion in foreign debt. The bank is based in Ibaraki Prefecture northeast of Tokyo and is part of Mebuki Financial Group Inc., Japan’s fourth-largest regional banking group by assets.
It followed the Japan banking industry trend of buying US Treasuries and other foreign bonds for their extra yield during the years of super-low interest rates at home. The danger of that strategy became clear though when the Federal Reserve began aggressively raising rates in 2022, causing dollar funding costs to shoot up and resulting in losses for Japanese banks.