A senior executive from Mizuho Financial Group stated that due to the continuous economic recovery possibly prompting the central bank to exit its negative interest rate policy early next year, Mizuho Financial Group is delaying the purchase of government bonds.
Kenya Koshimizu, the co-head of Mizuho's Global Markets Division, noted that after decades of attempting to escape deflation, the world's third-largest economy is now showing signs of change, including a virtuous cycle where rising inflation boosts profits, wages, and spending. His commentary highlights that Mizuho and other top Japanese banks are currently considering an upcoming turning point: after years of sluggish growth, weak consumer spending, and inflation, and extensive easing policies by the central bank, Japan's economy is nearing a return to policy normalization.
In an interview with Reuters, Koshimizu expressed that assuming risks associated with financial markets in the United States and China are managed, once the outlook for next year's wage negotiations becomes clear, the Bank of Japan has a "fairly good chance" of ending the negative interest rate. This suggests that for the first time in thirty years, the Japanese economy is beginning to experience structural changes. The annual wage negotiations between Japanese companies and unions are usually held in February or March.
Last month, the Bank of Japan adjusted its years-long Yield Curve Control (YCC) strategy, allowing Japanese Government Bond (JGB) yields to move more freely with the rising inflation and economic growth, and for the first time since 2014, the yield on 10-year JGBs broke through 0.6%. This change not only implies a prospect of rising borrowing costs in Japan but also indicates a significant transformation in the Japanese financial market after decades of low-interest rates.
Koshimizu said that in anticipation of a possible policy adjustment by the Bank of Japan and the current economic fundamentals potentially pushing bond yields higher, Mizuho has shortened the duration of its domestic bond investment portfolio since last October and does not plan to change this investment stance anytime soon.
Before the launch of a massive asset purchase program by the former Governor of the Bank of Japan, Haruhiko Kuroda, in 2013, the Japanese banking sector had been the largest holder of Japanese government bonds. The program lowered the yields of Japanese government bonds and led banks to transfer their deposits to their current accounts at the central bank.
This year, as the Japanese economy, inflation, and consumer spending continue to improve, the Bank of Japan has replaced banks as the largest holder of Japanese government bonds. Data shows that the share of Japanese government bonds held by the Japanese banking sector dropped from 43% to 11% by March this year.
Koshimizu stated that with the significant changes occurring in the Japanese economy, Japanese government bonds have become a viable investment target, and the flow of banking funds into the Japanese bond market will reverse. However, the pace of this change will depend on the situation of interest rate changes.
