The central bank retreats, major banks remain cautious, and there are no takers for Japanese government bonds!

As demand for Japanese government bonds hits a new low in over a decade, Mizuho Financial Group is adopting a "very conservative" securities investment strategy, significantly reducing its bond holdings, waiting for further clarity on the Bank of Japan's interest rate policy.

Mizuho CEO Masahiro Kihara stated at a press conference on Tuesday that the bank will not establish large-scale investment positions until it is certain that the Bank of Japan will not raise interest rates further.

Investor reports indicate that Mizuho has reduced its positions in Japanese and foreign government bonds. As of March this year, its holdings of Japanese government bonds have sharply decreased from 251 trillion yen three years ago to 83 trillion yen (approximately 57 billion USD).

Although its foreign bond holdings increased from 89 trillion yen to 118 trillion yen during the same period, the bank has recognized losses, leading to a decline in its foreign bond holdings compared to last year.

Currently, the Bank of Japan is working to fine-tune its quantitative tightening process, with market participants divided on when to accelerate or slow down bond purchases. Mizuho's cautious strategy may indicate that the market will maintain a cautious sentiment for the foreseeable future.

Mizuho's Cautious Layout: Significant Reduction in Bond Holdings, Awaiting Clarity on BOJ Policy

As Kihara's remarks were released, Japan's 20-year government bond faced its worst auction since 2012, with the bid-to-cover ratio dropping to 2.5 times and the tail risk soaring to the highest level since 1987. As of the end of last month, the Bank of Japan held 576.6 trillion yen in long-term government debt, only 2.2% lower than at the end of July 2024 (just before it began to slow down bond purchases).

The news led to further declines in Japanese government bonds on Tuesday. The yield on Japan's 20-year government bonds surged by about 15 basis points, reaching the highest level since 2000, while the yield on 30-year bonds rose to the highest level since the issuance of this bond type in 1999.

However, these market fluctuations may have little impact on Mizuho and other commercial banks, as they tend to purchase bonds with maturities of less than 10 years. Mizuho stated in its briefing that the average remaining maturity of its Japanese government bonds is one year, while the average remaining maturity of its foreign bonds is two years.

In addition to the bond market, Mizuho also announced plans to sell at least 350 billion yen worth of "strategic" holdings over the three years ending March 2028, which are stocks aimed at strengthening relationships with corporate clients Kihara stated that Mizuho is unlikely to engage in investment banking transactions in the United States. The bank acquired the New York boutique consulting firm Greenhill & Co. in 2023, and Kihara believes that the bank has already established sufficient products in this area. Notably, Moody's downgraded the U.S. credit rating from Aaa to Aa1 last Friday, further amplifying uncertainty in the global bond market.

Additionally, according to Kihara, Mizuho is also not very keen on traditional retail banking in Asia.

Japanese Bond Market Turmoil, Long-term Bonds Under Pressure

Currently, the Bank of Japan is working to fine-tune its quantitative tightening process, with market participants divided on when to accelerate or slow down the pace of bond purchases.

Some believe the central bank should accelerate the reduction of bond purchases, arguing that over half of Japan's government bonds are held by the Bank of Japan, which distorts the yield curve. Others emphasize that the pace should be slowed down, fearing that rapid tightening could exacerbate market liquidity issues.

There are also a wide range of views regarding the ultimate scale of bond purchases. Some believe the central bank should eventually stop purchasing bonds entirely, while others think it should buy between 1 trillion yen (approximately 6.9 billion USD) and 2 trillion yen per month, with some suggesting to maintain around 3 trillion yen.

The Bank of Japan is holding hearings with representatives from banks, securities firms, and life insurance companies to gather opinions on the pace of reducing bond purchases. The central bank is expected to update its plans to reduce its influence in the market at the board meeting ending on June 17.

Ryoma Nagatomo, senior fund manager at Norinchukin Zenkyoren Asset Management, stated:

“I do not want to touch ultra-long-term bonds, due to increasing fiscal risks and supply surplus issues.”