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Sumitomo Mitsui may resume JGB buys once inflation picks up

Bloomberg

Sumitomo Mitsui Financial Group Inc., the biggest seller of Japanese government bonds among the nation’s three biggest banks, may start buying again once inflation picks up, President Koichi Miyata said.

The lending unit of Japan’s second-largest bank by market value stopped selling JGBs after reaching the minimum it needs on hand to use as guarantees in interbank transactions, Miyata said in an interview Friday. Sumitomo Mitsui cut its debt holdings by 47 percent to ¥14.7 trillion as of September from a year earlier, company data show.

Sumitomo Mitsui sold the bonds and shifted its investments into stocks as the Bank of Japan made record purchases of debt, pushing down interest rates as part of Prime Minister Shinzo Abe’s plan to revive the world’s third-largest economy by stoking inflation. Once that strategy starts working, driving up returns on JGBs and steepening the yield curve, the bank may resume buying, Miyata said.

“If Japan’s yield curve starts to reflect the nation’s inflation and growth expectations straightforwardly, we would increase holdings of JGBs,” Miyata said. “The current level of bond ownership is just right, with the proportion of stock-related securities increasing.”

Japan’s lenders, which had been channeling customer deposits into government bonds rather than extending loans as deflation lingers, reduced sovereign debt holdings by 15 percent to ¥141 trillion in September from a year earlier, BOJ data show. Sumitomo Mitsui’s ¥12.8 trillion cut accounted for about half the total decrease.

Those sales, which cut Sumitomo Mitsui’s JGB holdings almost in half, compared with a 14 percent reduction at the equivalent unit of Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, and a 10 percent drop at Mizuho Financial Group Inc.’s lender, data from the companies show. Banks’ stockpiles of sovereign debt peaked at a record ¥171 trillion in March 2012, according to the BOJ.

By buying the securities, the BOJ pushes yields down, making them less attractive for lenders to hold. Haruhiko Kuroda, chosen by Abe to run the BOJ, doubled JGB purchases at his first Policy Board meeting on April 4, aiming to spur inflation to 2 percent in about two years. That compares with 0.9 percent in October.

“There’s a high chance that banks will shift their excess deposits back into JGBs if interest rates rise,” said Satoshi Yamada, debt trading manager in Tokyo at Okasan Asset Management Co., which oversees the equivalent of $11 billion. “I doubt the mega-banks will dump bonds when yields increase, like we saw in April and May, but it’s not yet time for them to switch back into JGBs,” he said, referring to the top three lenders.

Yields on Japan’s benchmark 10-year notes swung from a record low of 0.315 percent on April 5 to as high as 1 percent in May amid speculation that banks would sell debt to avoid price declines. Even so, the rate remained the lowest in the world at 0.68 percent at 11:30 a.m. Wednesday in Tokyo.

“I don’t expect a sudden jump in yields, because the BOJ is watching markets closely when it buys bonds,” said Miyata. “Rates are just too low right now to make a profit, but in the long run, as Abe achieves his targets, interest rates will definitely become different from what we see now.”

The BOJ’s more than ¥7 trillion in monthly government bond buying has crushed the nation’s yield curve to the flattest since 2003 this year. The yield premium 10-year notes offer over five-year paper fell to 32 basis points in April, after the BOJ announced details of its stimulus, according to data compiled by Bloomberg. The gap was at 47 Wednesday, the data show.

Abe’s three-pronged strategy of fiscal spending, monetary easing and business deregulation, dubbed “Abenomics,” has also driven a decline in the yen and an equity rally. The benchmark Topix index has climbed 46 percent in 2013, the best performance among developed markets, helping Sumitomo Mitsui’s earnings in the April-September period rise to a record.

Net income jumped 53 percent from a year earlier to ¥505.7 billion, the highest half-year earnings in Sumitomo Mitsui’s 11-year history.