Negative Rates Push Japan Banks From JGBs Toward Foreign Assets

  • Regional banks surveyed by Bloomberg see need for rebalancing
  • `JGBs are losing appeal,' says Bank of Kyoto executive officer

Japan’s regional banks are shifting their investments toward riskier assets abroad or outside of fixed income as yields below zero erode the appeal of Japanese government bonds.

Ten of 11 banks surveyed by Bloomberg this month said portfolio rebalancing is necessary under the Bank of Japan’s negative-rate policy, with eight saying they’ve already begun or are considering asset reallocation. Foreign bonds and alternative investments that typically include assets such as real estate and infrastructure were identified as the most popular products by eight of the banks, while two said they favor Japanese and foreign stocks. One declined to comment on potential investments.

QuickTake Negative Rates

“JGBs are losing appeal as an investment asset,” said Yoshihiro Yamanaka, an executive officer at Bank of Kyoto Ltd., one of the lenders surveyed. “We have to turn to foreign bonds, such as U.S. and European notes, or alternative products, to meet business expectations for securing profits.”

Regional banks are lagging behind their larger competitors in reducing the nation’s bonds and expanding overseas as they struggle to generate earnings in an economy that shrank an annualized 1.1 percent last quarter. Even before the Bank of Japan implemented its negative-rate policy last month, the Financial Services Agency estimated in July that pretax profit at about 20 percent of local banks would fall by at least half in three years as low rates depress income.

“The reinvestment environment is getting more difficult and selling current JGB holdings will only provide one-time profits,” said Souichi Takeyama, a rates strategist in Tokyo at SMBC Nikko Securities Inc. “When they sell and re-invest, they’ll have to take bigger risks in foreign bonds or credit but that will be subject to monitoring by the FSA.”

Among the banks surveyed, only one said it would boost stockpiles of Japanese sovereign debt. Six said they would reduce holdings, three plan to keep them steady and one said it’s still reviewing its allocation. Their duration strategy was split, with three planning to lengthen, three maintaining and two looking to shorten. Three were undecided.

Japan’s regional banks had 36.2 trillion yen ($319 billion) in JGBs as of January, accounting for about a third of the holdings by all lenders. The smaller banks’ holdings have declined 11 percent from a year earlier, according to central bank data.

Negative rates will erode local lenders’ profitability by 15 percent, almost double the 8 percent reduction for big banks, because of their greater reliance on interest income, Standard & Poor’s estimated last month.

‘Scares Me’

None of the banks surveyed said they appreciated the BOJ’s negative-rate policy. Benchmark 10-year bond yields hit a record low of minus 0.1 percent on March 8 and were at minus 0.015 percent on Wednesday morning. Ten-year U.S. Treasuries yield almost 2 percent.

“We can possibly pursue portfolio rebalancing with risk-taking in the next six months or so,” Bank of Kyoto’s Yamanaka said. “But if this rate policy continues for one or two more years, it scares me to think what we would be doing. The longer the current situation lasts, the more difficult the challenges we face.”

BOJ Governor Haruhiko Kuroda said Wednesday that the central bank could theoretically lower the deposit rate to minus 0.5 percent from the current minus 0.1 percent. While his board refrained from bolstering monetary stimulus at a policy meeting Tuesday, most economists surveyed by Bloomberg expect it to take rates further negative by July.

Joyo, Yokohama

Joyo Bank Ltd. said it has been reshuffling its securities portfolio into foreign bonds, domestic and overseas stocks, alternatives and others from yen bonds since before the BOJ began charging lenders on some of their reserves in February.

Bank of Yokohama Ltd. said it will maintain its current levels of JGBs as collateral for the BOJ, while Daishi Bank Ltd. said investing in the securities is difficult given negative yields. Shizuoka Bank Ltd. said it began limiting JGB investment even before the introduction of negative rates, based on its outlook for yields.

Yamanaka said Bank of Kyoto is taking appropriate risks for profitability within the limit of what it has been investing and the low-rate environment will constrain its risk-taking capacity.

“Risk-taking is aimed at income gains but risks only surface when the investment comes to maturity,” said Nana Otsuki, an executive director and chief analyst at Monex Group Inc., a Japanese online securities firm. “So they shouldn’t be too focused on near-term gains.”

Banks that responded to the survey:

  • Bank of Fukuoka Ltd.
  • Bank of Kyoto Ltd.
  • Bank of Yokohama Ltd.
  • Chiba Bank Ltd.
  • Chugoku Bank Ltd.
  • Daishi Bank Ltd.
  • Gunma Bank Ltd.
  • Hachijuni Bank Ltd.
  • Joyo Bank Ltd.
  • Shizuoka Bank Ltd.
  • Toho Bank Ltd.
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