Top Japan Regional Bank Holds JGB Buying on Bet Rates to Climb

Yahoo

05-03-2025

(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.
To avoid losing money from rising interest rates, Joyo has opted for more floating-rate products in its foreign bond portfolio including collateralized loan obligations, doubling the portion of floaters to about 60% in the last three years. The bank holds about ¥180 billion worth of CLOs, and Toba said more buying is planned if spreads don't tighten too much.
Joyo also holds debt issued by Japanese government-affiliated organizations that are relatively safe but have marginally higher returns than sovereigns, including their five-year to seven-year notes and residential mortgage backed securities, Toba said.
He also said the bank will gradually increase investment in domestic stocks and private equity as selling down its strategic holdings of corporate clients' shares will give it space to invest in more risk assets. Japanese policymakers have been pushing companies to unwind cross-shareholdings with allied firms to foster more competition.
Unusually for a Japanese bank, Joyo's market team isn't based in its Tokyo office or its headquarters in the prefectural capital of Mito, but in Tsukuba, known for a highly rated university and science research centers.
It moved there in 2021 after having to leave its Tokyo building that was being renovated. While a rapid train service that takes about an hour to get into Tokyo has allowed some team members to commute from the metropolis, the location is an issue in seeking market professionals.
'I think it doesn't fall within the target' for those looking for job opportunities in Tokyo, he said, adding the bank is now trying to find people already living in nearby areas.
(Adds map of the bank's areas of operation)
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