Low interest rates have persisted for a long time! Japanese regional bank giants are preparing to "strike back" in the bond market after interest rates reach their peak.

The largest regional bank in Japan, Bank of Yokohama Ltd., recently stated that once the interest rate peak of the Bank of Japan approaches, the bank is prepared to re-enter the domestic bond market on a large scale. Hitoshi Inoue, who is responsible for market operations at the bank, pointed out that the Bank of Japan is likely to keep the interest rate unchanged this month, but is "highly likely" to raise it to 0.75% in December or next January. He also revealed that Bank of Yokohama is currently cautious about Japanese government bonds. Inoue's core expectation is that the Bank of Japan will raise interest rates again in the fiscal year starting in April 2026 and take further action in subsequent fiscal years, ultimately pushing the interest rate peak to 1.25%. He believes that these measures may push the yield on 10-year Japanese government bonds to around 2%. On Wednesday, the benchmark yield on 10-year Japanese government bonds in the Tokyo market was reported at 1.65%. Inoue stated in an interview that the Japanese banking industry has struggled for many years due to significantly reduced loan interest spreads caused by extremely low interest rates, but "the situation is completely reversed now." He emphasized that "in an interest-bearing environment, our core investment portfolio will consist of sovereign bonds, Japanese and US stock index investments." Currently, the Bank of Japan remains the largest holder of Japanese government bonds. As the bank gradually reduces its bond-buying scale to exit monetary stimulus policies, market participants are closely watching whether commercial banks will re-enter the government bond market. Since the Bank of Japan launched aggressive monetary easing policies in 2013, Japanese banks including Bank of Yokohama have increased their holdings of foreign bonds and other assets to compensate for the declining returns on domestic bonds. Now, market participants are also closely watching whether Japanese investors will sell these overseas assets and bring funds back home. Bank of Yokohama, headquartered in Yokohama, a port city near Tokyo, is the core subsidiary of Yokohama Financial Group Inc. As of the end of June, the securities investment portfolio of the financial group was approximately 2.1 trillion yen (equivalent to 14 billion US dollars), excluding planned assets to be held until maturity. About half of the holdings are Japanese government bonds and other yen-denominated bonds. Inoue revealed that in the first half of the fiscal year ending in September, Bank of Yokohama has started to "slightly" purchase Japanese government bonds, mainly focusing on two-year and five-year varieties, as the yields on these bonds have become attractive. Since the beginning of the year, the yield on two-year Japanese government bonds has risen by about 33 basis points to around 0.935%; the five-year yield has increased by about 48 basis points to around 1.225%. He stated that once the time is right, the bank will mainly purchase short-term and medium-term government bonds to match its liability structure, which is primarily made up of customer deposits with relatively short maturities. Inoue also pointed out that the bank will maintain its current investment position in the second half of the fiscal year ending in March 2026. The bank executive mentioned that if inflation and economic conditions meet the Bank of Japan's expectations, and the central bank policy interest rate reaches the expected peak, Bank of Yokohama will "fully" increase its holdings of Japanese government bonds. It is understood that Inoue joined Bank of Yokohama in 1997 and became an executive in charge of market operations in April of this year. According to the Bank of Yokohama's official website, the bank's history can be traced back to 1920. At that time, a major bank in Yokohama was in financial trouble, and the local business community requested the government to establish a new bank to help depositors and stabilize the local economy, leading to the birth of Bank of Yokohama. Inoue stated that even if the bank shifts significantly to increasing its holdings of Japanese government bonds in the future, it will still retain some US government bonds in its portfolio as safe assets. He revealed that the current cost of USD financing for Japanese investors is high, so the bank is currently buying US government bonds mainly to earn short-term capital gains. Furthermore, Bank of Yokohama will maintain a stable holding size of its collateralized loan obligations (CLO). Inoue believes that CLOs are "high-quality holding assets with a solid return."