Japanese bank calms bond sale fears

Lender says it may buy Japanese government debt amid fears of a mass sell-off by holders

PUBLISHED : Tuesday, 23 July, 2013, 12:00am
UPDATED : Tuesday, 23 July, 2013, 3:56am

Fukuoka Financial Group is considering adding to its Japanese government bond (JGB) holdings, potentially easing concern that regional banks may dump the notes in anticipation of an end to deflation.

The nation's second-largest regional bank by assets sold a net 100 billion yen (HK$7.71 billion) of JGBs after the Bank of Japan's unprecedented monetary stimulus in April sent yields on benchmark 10-year bonds to a record low that month, President Masaaki Tani said.

"We're considering buying JGBs if long-term yields climb above 1 per cent," Tani said on July 18. "There's no plan to change our JGB-centred portfolio."

The lender contrasts with Bank of Yokohama, Japan's biggest regional bank, which is seeking to diversify assets away from sovereign debt as Prime Minister Shinzo Abe's campaign to stoke inflation risks eroding the value of JGBs. Tani, who said Abe's policies have yet to benefit rural areas, is targeting a 13 per cent increase in loans over three years.

Yields on Japan's benchmark 10-year notes fell 2 basis points to 0.785 per cent yesterday, the lowest since May 14, after Abe's Liberal Democratic Party won control of the upper house in elections on Sunday. Yields swung between an all-time low of 0.315 per cent on April 5, the day after the Bank of Japan announced a plan to double bond purchases, to as high as 1 per cent in May.

Fukuoka Financial, based on the southern island of Kyushu, held 1.59 trillion yen of JGBs as of March 31, accounting for about 60 per cent of its 2.6 trillion yen securities portfolio, which also includes foreign bonds and stocks, company data show. The impact of any yield increase is limited for the bank as it usually holds notes until they mature to receive coupon payments and the principal, Tani said.

"People say it's dangerous to hold large amounts of JGBs when yields rise," he said. "But that just gives you unrealised losses, which aren't reflected in the income statement."

Japanese banks accumulated government debt over the past 15 years as deflation and economic stagnation caused deposits to pile up and loans to decline. That strategy has come into question as the public debt swells to the highest in the world and Abe tries to spur prices with fiscal and monetary stimulus combined with deregulation.

Consumer prices excluding fresh food in Japan probably rose 0.3 per cent in June from a year earlier, the first increase in 14 months, according to the median estimate of economists surveyed before government figures due on July 26.

Local banks' sovereign debt holdings swelled 49 per cent over the past five years to 43.4 trillion yen in May, Bank of Japan data show. Bank of Yokohama President Tatsumaro Terazawa said last month that his company sold all Japanese government notes with a maturity longer than five years to counter the risk of yields rising. Bond prices fall as yields climb.

"What is most important is whether regional banks are prepared to manage risks when yields increase," said Tani, who is also chairman of Japan's main regional bank lobby group. "And I believe most of them are."

Shares of Fukuoka Financial rose 0.2 per cent to 460 yen at the close of trading in Tokyo. They have gained 34 per cent this year, less than the 45 per cent advance of the 85-stock Topix Banks Index.

Fukuoka Financial plans to increase corporate and retail banking staff and expand consumer credit to increase loans by 1.2 trillion yen by March 2016, Tani said. The bank had 8.9 trillion yen in loans outstanding as of March 31.