Japan's largest bank, MUFG, is cautiously resuming investments in the country's benchmark government bonds, monitoring the risk of further yield spikes due to fiscal and monetary policies. Atsushi Yamashita, head of MUFG Bank's global markets business, expects 10-year government bond yields to peak around 3.2%, slightly above the recent three-decade high of 3.115%. However, he warns risks are not eliminated, citing potential BOJ struggles with inflation and Prime Minister Sanae Takaichi's ability to manage government finances.
Global investors are grappling with yield surges in major economies amid fiscal sustainability concerns. MUFG, along with rival banks, is watched for signs of a stance shift. The bank's banking and trust units held a combined ¥85 trillion ($537 billion) in bonds as of June, with average JGB duration shrinking to 1.2 years from 3.1 last year.
MUFG began exploratory 10-year JGB purchases at around 3.1%. While the base case targets a 3.2% peak, risks exist for mid-to-high 3% levels. Ten-year JGB yields dipped 5 basis points to 2.945% on Thursday.
Markets await Takaichi's fiscal policy, especially given Japan's high debt-to-GDP ratio. Yamashita emphasizes the need for fiscal policy without over-reliance on optimistic growth scenarios. The Bank of Japan's policy outlook also poses risks, with soaring energy costs and a weak yen fueling inflation.
Yamashita predicts the BOJ's next rate hike in December, with more hikes in three-month intervals, targeting a terminal rate around 2%. MUFG rules out immediate repatriation but may increase foreign-bond investments if domestic yields become attractive.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing