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| Osaka, Japan. Source: iStock via Getty Images. |
Japanese megabanks are set to move more of their excess cash to low-yield domestic government bonds from U.S. Treasurys in coming months, or until U.S. benchmark yields stabilize.
Some megabanks in the world’s third-largest economy indicated they might reduce their holdings in U.S. Treasurys after reporting valuation losses in their foreign fixed-income assets in the fiscal quarter ended Dec. 31, 2021. U.S. yields rose in late 2021, causing bond prices to fall, as investors prepared for an earlier-than-expected interest rate hike and the possibility the Federal Reserve may cut its bond holdings sooner.
Once U.S. yields stabilize, probably later this year when the expectations of interest rate hikes are priced in, Japanese megabanks are likely to rebuild their holdings in U.S. Treasurys due to much higher returns compared with domestic government bonds, analysts said.
“As the Japanese megabanks are conservative, they may be reluctant to go outside in upcoming months,” Takahide Kiuchi, executive economist at Nomura Research Institute. “But where they want go most is Treasurys.”
Allocation of excess cash is one of the priorities for Mitsubishi UFJ Financial Group Inc., or MUFG, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. as they seek higher returns from non-lending businesses while sitting on ample deposits and facing tepid loan demand.
“[Japanese banks] will go to Treasurys sooner or later when a rise in the interest rates loses steam by pricing in a series of rate hikes,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute. “Basically, they aim for an income gain from bond investment.”
Conservative strategy
“We’ll be dealing with the valuation loss … and we’ll take a conservative stance [on foreign bonds investment] for a while because of the uncertain outlook for interest rates,” Mizuho CFO Makoto Umemiya said during a Feb. 2 online earnings conference. “[But] if there is a chance, we’ll invest in foreign bonds.”
The CFO did not elaborate further.
At the end of their fiscal third quarter in December 2021, MUFG, Sumitomo and Mizuho reported a combined valuation loss of ¥354.6 billion in their foreign bond holdings, compared with a combined valuation gain of
Meanwhile, MUFG posted a valuation gain of ¥66.7 billion in its Japanese bond holdings, while Sumitomo and Mizuho made a loss of ¥13.0 billion and ¥20.8 billion such assets.
The 10-year yields on the Japanese government bonds stood at 0.202% on Feb. 21, up from 0.082% at the start of 2022. But the rise is unlikely to accelerate, analysts said, as the Bank of Japan has not indicated any intention to change the implicit 0.25% cap on the yield.
The comparable U.S. yields came at 1.856% on Feb. 22, retreating from a two-year high earlier this month, as the Federal Reserve is expected to raise the interest rates by a quarter percentage basis point several times this year, starting in March, to cool inflationary pressure. Economists expect the 10-year yields will likely hover between 2.2% and 2.5% in the coming months.
“[Japanese megabanks'] main option could be U.S. Treasurys, mainly 10-year bonds, to earn a higher income gain,” said Koichi Niwa, an analyst at Citigroup Global Markets Japan Inc.
As of Feb. 21, US$1 was equivalent to ¥114.82.