Business / Economy

BOJ’s higher JGB yield said too low for regional lenders to switch strategies

Bloomberg

The yields on Japan’s benchmark bond are still too low to lead to any change in investment strategies for regional lenders, even after the central bank permitted a higher trading range, according to managers and traders at the companies.

Regional lenders want to see 0.5 percent on the 10-year bond before considering a pivot back from overseas markets, according to bankers who asked not to be identified in discussing strategies. Still, the Bank of Japan’s new guidance, tolerating a yield of as high as 0.2 percent, has spurred volatility and is boosting trading profits, they said.

The BOJ’s policy tweaks, made partly to ease the pain its stimulus is creating for local banks, have spurred speculation that Japanese funds could shift some of the $2.4 trillion invested in overseas debt back home. Regional banks account for about a fifth of foreign securities held by the whole banking sector, or the equivalent of $80 billion, according to data from the central bank.

“A slight yield steepening is welcome but it’s too marginal to hope for a dramatic change to banks’ profitability,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “A steepening by a mere few basis point after the BOJ’s decision isn’t sufficient to ease the severe situation facing them.”

Years of BOJ monetary easing have squeezed lending margins at Japanese banks and lowered income from domestic securities, with Gov. Haruhiko Kuroda acknowledging the pain on July 31 when he said the BOJ will allow a wider swing in bond yields.