Japan's biggest banks ready to increase JGB holdings

Japan’s largest banks are preparing to increase their exposure to Japanese government bonds as rising interest rates begin to offer more attractive returns, even though unrealised losses on existing bond portfolios have expanded.

After years of maintaining limited exposure to long-term government debt due to ultra-low interest rates, major lenders are now signaling a shift in strategy. Higher yields are prompting banks to reconsider Japanese government bonds as a viable source of future income, despite recent market volatility.

Bond yields climbed sharply from November following new government spending plans, which reduced the market value of bonds purchased at lower yields and pushed unrealised losses higher. However, conditions have stabilized in recent weeks. Demand at government bond auctions has remained solid, and long-term yields have eased from recent record highs.

Executives at leading banks have indicated that they plan to rebuild bond portfolios gradually and cautiously, focusing on market timing and interest-rate expectations. In recent months, some institutions reduced exposure to longer-dated bonds to limit losses, concentrating instead on short-duration holdings.

While valuation losses have increased significantly over the past year, bank officials see higher yields as an opportunity rather than a deterrent. Analysts also note that further interest-rate hikes could delay large-scale purchases, particularly given concerns over Japan’s high public debt and future fiscal expansion.

Still, rising rates are already supporting stronger profitability across the sector. Higher policy rates have boosted net interest margins, helping major banks forecast record earnings. Market performance reflects this optimism, with banking stocks significantly outperforming the broader equity index since rate hikes began.

Looking ahead, analysts expect that rebuilding longer-duration bond positions at higher yields could further strengthen bank earnings over the coming years. Updated forecasts point to substantial increases in net profits, supported by higher interest rates, stronger yields, and a weaker yen.