As Japan Turns on 'Austerity Signal,' 10-Year Government Bond Yields Surge... Bank Stocks Investment Rush

Investor Sell-Off of Japanese Government Bonds
Moves to Increase Bank Stock Holdings
End of Easing Monetary Policy
Expected to Be Moved Up from Year-End to First Half of Next Year

Kazuo Ueda, Governor of the Bank of Japan (BOJ), mentioned the possibility of ending the 'negative (-) interest rate' policy, leading to a continued rally in Japan's 10-year government bond yields, which hit their highest level in 9 years and 8 months. This is due to growing expectations that the BOJ may end its accommodative monetary policy, which has lasted for the past decade, sooner than anticipated. Investors have actively bet on rising interest rates by selling government bonds, which are expected to decline in price (= bond yields rise), and increasing their holdings in Japanese bank stocks.

Bank of Japan.

On the 13th, in the Tokyo bond market, the yield on newly issued 10-year Japanese government bonds stood at 0.706% as of 9:26 a.m. The 10-year yield briefly rose to 0.721% during the previous trading session, reaching its highest level since January 2014.

The 2-year government bond yield, which best reflects the policy rate, was recorded at 0.031%. The 2-year yield surged to as high as 0.050% during the previous session, marking the highest level since January (0.055%). If the 2-year yield rises above 0.055%, it will reach its highest level in 8 years and 7 months since February 2015.

Governor Ueda's mention of abolishing the negative interest rate had a significant impact on the rise in government bond yields. Earlier, in an interview with the Yomiuri Shimbun published on the 9th, Governor Ueda stated that once there is confidence that inflation can consistently achieve the BOJ's 2% target, the removal of the negative interest rate could be considered as one of several options. Japan has kept short-term interest rates at -0.10% for over seven years since 2016.

The market interpreted Governor Ueda's remarks as hawkish (favoring monetary tightening), intensifying the sell-off in government bonds. Takashi Yamawaki, head of bond research at JP Morgan Securities, explained, "It seems that more investors are predicting that Japan will exit the negative interest rate policy sooner than expected."

The market's expected timing for the end of the BOJ's accommodative monetary policy has also been brought forward from the end of next year or the year after to the first half of next year. Rising oil prices and a prolonged weaker yen have increased the likelihood that the BOJ will shift to a tightening stance sooner. Signs of wage increases among companies, which have stagnated for 30 years, are also expected to influence the BOJ's decision to revise its policy.

Mari Iwashida, chief market economist at Yamato Securities, predicted, "The expected timing for the abolition of the negative interest rate will be accelerated from mid-2025 to April next year." Deutsche Securities also forecast that the BOJ will end the negative interest rate policy in January next year, earlier than their previous estimate of December next year.

As the possibility of the BOJ shifting to tightening gains weight, investors are increasing their holdings in Japanese bank stocks. This is based on expectations that banks' interest income will rise if the benchmark interest rate increases in the future.

Everrich Asset Management significantly increased the proportion of bank stocks in its portfolio of the 'Japan Growth Fund,' which invests in Japanese listed companies this year. The shares of Japan's financial holding companies, Mitsui Sumitomo Financial Group and Mitsubishi UFJ Financial Group, increased by 69.69% and 75.38%, respectively, compared to the previous year.

Atom Capital Management, a Japanese investment advisory firm, is also reported to have purchased Japanese bank stocks after the BOJ expanded the fluctuation range of long-term interest rates under its Yield Curve Control (YCC) policy from ±0.25% to ±0.5% in December last year. Atsuko Tsujiya, CEO of Atom Capital Management, forecasted, "Currently, bank stocks have a low price-to-book ratio, so their prices could rise by another 30%."

Yutaka Uda, Chief Investment Officer (CIO) of Everrich Asset Management in Japan, stated, "Since the BOJ may end the negative interest rate policy early, the value of bank stocks could double over the next 18 months," adding, "If necessary, there is room to increase the weighting of bank stocks."

This content was produced with the assistance of AI translation services.