Low interest rates have persisted for a long time! Japanese regional banking giants are preparing to "return" to the bond market after interest rates peak

According to Zhitong Finance APP, Japan's largest regional bank, Bank of Yokohama Ltd., recently stated that it is ready to re-enter the domestic bond market in a big way once the peak interest rate of the Bank of Japan approaches.

Hitoshi Inoue, who is responsible for the bank's market operations, pointed out that the Bank of Japan is likely to maintain interest rates this month, but it is "very likely" to raise rates to 0.75% in December or January next year. He also revealed that the Bank of Yokohama remains cautious about Japanese government bonds at this time.

Inoue's core expectation is that the Bank of Japan will raise interest rates again in the fiscal year starting in April 2026, and will take further action in subsequent fiscal years, ultimately pushing the peak interest rate to 1.25%. He believes that this series of measures could raise the yield on 10-year Japanese government bonds to around 2%. On Wednesday, the benchmark yield on 10-year Japanese government bonds was reported at 1.65% in the Tokyo market.

Inoue stated in an interview that the Japanese banking industry has "struggled" for many years due to extremely low interest rates that significantly compressed loan spreads, while "the current situation is completely the opposite." He emphasized that "in an environment with interest rates, our core investment portfolio will consist of sovereign bonds and investments in Japanese and U.S. stock indices."

Currently, the Bank of Japan remains the largest holder of Japanese government bonds. As the bank gradually reduces its bond purchases to exit its monetary stimulus policy, market participants are closely watching whether commercial banks will re-enter the government bond market.

After the Bank of Japan launched its aggressive monetary easing policy in 2013, Japanese banks, including the Bank of Yokohama, increased their holdings of foreign bonds and other assets to make up for the decline in domestic bond yields. Now, market participants are also closely monitoring whether Japanese investors will sell these overseas assets and bring funds back to the domestic market.

The Bank of Yokohama, headquartered in the port city of Yokohama near Tokyo, is a core subsidiary of Yokohama Financial Group Inc. As of the end of June, the financial group's securities investment portfolio was approximately 21 trillion yen (equivalent to 14 billion USD), excluding assets planned to be held to maturity. About half of the holdings are Japanese government bonds and other yen-denominated bonds.

Inoue revealed that in the first half of the fiscal year ending in September, the Bank of Yokohama has begun to "slightly" purchase Japanese government bonds, mainly focusing on two-year and five-year maturities, as the yields on these bonds have become attractive. Since the beginning of the year, the yield on two-year Japanese government bonds has risen by about 33 basis points to around 0.935%; the five-year yield has increased by about 48 basis points to around 1.225%.

He stated that once the timing is right, the bank will mainly purchase short-term and medium-term government bonds to match its liability structure, which is primarily composed of relatively short-term customer deposits Inoue also pointed out that the bank will maintain its current investment stance in the second half of the fiscal year ending March 2026.

The bank executive stated that if inflation and economic conditions align with the Bank of Japan's expectations, and the central bank's policy interest rate reaches the anticipated peak, Yokohama Bank will "fully" increase its holdings of Japanese government bonds.

It is understood that Inoue joined Yokohama Bank in 1997 and became an executive responsible for market operations in April of this year.

According to Yokohama Bank's official website, the bank's history dates back to 1920. At that time, a major bank in Yokohama City fell into financial trouble, prompting the local business community to request the government to establish a new bank to rescue depositors and stabilize the local economy, leading to the birth of Yokohama Bank.

Inoue stated that even if the bank begins to significantly increase its holdings of Japanese government bonds in the future, it will still retain some U.S. Treasury bonds in its asset portfolio as a safe asset.

He revealed that currently, the dollar financing costs for Japanese investors remain high, so the bank's current purchase of U.S. Treasury bonds is mainly to obtain short-term capital gains.

In addition, Yokohama Bank will also maintain a stable position in its collateralized loan obligations (CLO). Inoue believes that CLOs are "high-quality holding assets with stable returns."