Abenomics Goal No Deterrent to Fukuoka Financial Buying JGBs

Fukuoka Financial Group Inc. (8354) is considering adding to its Japanese government bond 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 ($1 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 in an interview in Tokyo.

“We’re considering buying JGBs if long-term yields climb above 1 percent,” Tani, 70, said on July 18. “There’s no plan to change our JGB-centered portfolio.”

The lender contrasts with Bank of Yokohama Ltd., 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 percent increase in loans over three years.

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

Photographer: AKio Kon/Bloomberg

Masaaki Tani, president of Fukuoka Financial Group Inc. Close

Masaaki Tani, president of Fukuoka Financial Group Inc.

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Photographer: AKio Kon/Bloomberg

Masaaki Tani, president of Fukuoka Financial Group Inc.

Bond Danger

Fukuoka Financial, based on the southern island of Kyushu, held 1.59 trillion yen of JGBs as of March 31, accounting for about 60 percent 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 unrealized 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 exceeding fresh food in Japan probably rose 0.3 percent 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.

Photographer: AKio Kon/Bloomberg

Masaaki Tani, president of Fukuoka Financial Group Inc. Close

Masaaki Tani, president of Fukuoka Financial Group Inc.

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Photographer: AKio Kon/Bloomberg

Masaaki Tani, president of Fukuoka Financial Group Inc.

Yokohama Bank

Local banks’ sovereign debt holdings swelled 49 percent 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 percent to 460 yen at the close of trading in Tokyo. They have gained 34 percent this year, less than the 45 percent 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.

“We have yet to see the effect of Abenomics, but expectations are there,” said Tani, referring to the moniker for the prime minister’s policies. “We need to revitalize local regions to revive the Japanese economy. Our role is to support this through financing.”

Fukuoka Financial was created in April 2007 after Bank of Fukuoka Ltd. paid 90 billion yen to buy Kumamoto Family Bank Ltd. The group agreed a month later to purchase Shinwa Bank Ltd., also based on Kyushu Island, for 76 billion yen.

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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