(Updates with analyst comment in eighth paragraph.)
Dec. 25 (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 a Dec. 20 interview. Tokyo-based Sumitomo Mitsui cut its debt holdings by 47 percent to 14.7 trillion yen ($141 billion) 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 yen in September from a year earlier, central bank data show. Sumitomo Mitsui’s 12.8 trillion-yen 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 yen in March 2012, according to the central bank.
By buying the securities, the Bank of Japan pushes yields down, making them less attractive for lenders to hold. Haruhiko Kuroda, chosen by Abe to run the central bank, 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 megabanks 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. 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 yen 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 central bank announced details of its stimulus, according to data compiled by Bloomberg. The gap was at 47 today, 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 climb to a record.
Net income jumped 53 percent from a year earlier to 505.7 billion yen, the highest half-year earnings in Sumitomo Mitsui’s 11-year history, the bank said last month.
Sumitomo Mitsui had a 60.4 billion-yen gain from equity- related investments in the first half, compared with a loss a year earlier, its earnings statement showed. Miyata predicted that the performance will continue.
“There is no doubt that economies are looking up in Japan and the U.S., so I expect bull markets for the countries’ stocks going into the next year,” said Miyata. Gains on stock investments “will tide us over until our lending business catches up with the rebound in equity markets.”
--With assistance from Mariko Ishikawa in Tokyo. Editors: Nathaniel Espino, Tomoko Yamazaki