After losing $400 million, another cut is on the way! This Japanese regional bank plans to sell more Japanese government bonds, betting on a rate hike by the central bank this month.

In the last financial year, Yamaguchi Financial Group Inc. recorded a loss of $400 million due to the sale of Japanese government bonds. At that time, the group believed it had completed its "cleaning up" task several years in advance, but it turned out that this was far from enough. Yamaguchi Financial Group's CEO Keisuke Mukunashi stated that, affected by the Bank of Japan's interest rate hikes happening faster than expected, the group plans to further reduce its holdings of Japanese government bonds from its securities portfolio, which amounts to 20.4 trillion yen (approximately $130 billion). "We initially concentrated our five-year loss-limiting plan into just one year," Mukunashi said in an interview at the group's headquarters located in Shimonoseki City, the westernmost point of Honshu Island, Japan. However, he admitted, "The speed of market fluctuations is indeed too fast, and it is difficult to keep up with the situation based solely on previous operations." As the Bank of Japan attempts to curb inflation in a long-term deflationary economic environment, bond yields have soared, putting immense pressure on banks and investors. Mukunashi anticipates that the Bank of Japan will raise interest rates this montha move that is widely expected by the marketand may raise rates again before the end of March next year. On Tuesday, the benchmark 10-year Japanese government bond yield hit the 3% mark for the first time in thirty years, leading to a massive sell-off of bonds and further expanding the unrealized losses on bank balance sheets. Although banks can choose to hold bonds to maturity to avoid actual losses, this means missing opportunities to shift funds to higher-yielding assets. Mukunashi indicated that Yamaguchi Financial will sell domestic bonds that have incurred unrealized losses and increase its holdings of short-term government bonds with maturities of five years or less. With the Bank of Japan continuing to raise interest rates, short-term rates are also on the rise. As of the end of March this year, the securities portfolio held by Yamaguchi Financial's three banks includes approximately 13.4 trillion yen in Japanese government bonds and other local bonds. At the beginning of this financial year, Yamaguchi Financial originally planned to shorten the duration of its domestic bond portfolioindicating sensitivity to yield changesby 0.6 to 4.8 years. Mukunashi revealed that the group now intends to further compress the duration. He stated that the extra losses from bond disposals would be offset by profits from equity holdings. Mukunashi views Japanese stocks as an important hedge against inflation. He mentioned that the group maintains a "slightly overweight" position in stocks within its securities portfolio and is gradually increasing its investment mainly through exchange-traded funds (ETFs). In addition, Mukunashi introduced that Yamaguchi Financial is actively bringing in external talent, having seen two experienced professionals join its market team in the last financial year. After years of ultra-low interest rates and weak credit demand, the Japanese banking sector is now experiencing a loan recovery, leading to intensified competition for deposits as a cheap and stable source of funds. Meanwhile, as inflation erodes cash purchasing power, savers are also more motivated to compare options and seek higher interest rate deposit products or shift their funds toward investments. Ironically, Japanese government bonds themselves have also become a potential investment option. After the Bank of Japan reduced its unprecedented bond-buying scale, the Japanese government is studying ways to attract household funds into the bond market. "If policies such as tax incentives are introduced to enhance the appeal of government bonds for individual investors, some interest rate-sensitive term deposits and household idle funds may flow into government bonds," Mukunashi stated, noting the rising trend in Yamaguchi Financial's retail government bond sales. "This change is worth close attention." He added that the financial group does not intend to engage in a "price war" to attract funds by raising deposit rates but will focus on building "sticky" accountsthose used for daily transactions such as receiving wages, pensions, and paying bills. The financial group owns Yamaguchi Bank, Momiji Bank, and Kitakyushu Bank, with total assets of approximately 130 trillion yen. So far this year, its stock price has risen by 53%, slightly outperforming the Topix Banks Index's 50% gain. In recent years, the pace of consolidation in Japan's regional banking sector has accelerated, leading to market speculation about the next round of mergers. Mukunashi did not rule out this possibility. "If the other party shares our goals and values, a merger could be an option," he said, "but this is just one of the options. Partners could also be companies outside the banking sector."