Japan's primary banking industry group has issued a caution that the upward trajectory of government bond yields could lead to asset write-downs and a squeeze on profitability, according to a statement from its leader on Thursday.

Masahiko Kato, who serves as both the chairman of the Japanese Bankers Association and the president of Mizuho Bank, highlighted at a press conference that sustained increases in Japanese government bond (JGB) yields may trigger asset devaluations and force banks to realize losses on their holdings.

Kato suggested that domestic lenders are unlikely to aggressively expand their JGB portfolios until the outlook for yields becomes more predictable and the central bank's policy rate reaches its peak. Over the past two years, rising interest rates have bolstered lending margins, enabling Japan's largest banks to post record profits. However, the same yield surge has concurrently swelled unrealized losses on their bond portfolios.

To date, this pressure has been manageable, as most institutions have retained the capacity to hold these securities until maturity. A senior Japanese financial regulator stated this month that authorities are closely scrutinizing whether banks are adequately managing the risks associated with rising interest rates across all facets of their operations, encompassing bond holdings, corporate loans, and ultra-long-term mortgages.

Financial Services Agency Commissioner Hideki Ito remarked in an interview that aggregate paper losses across the industry remain at manageable levels, and clarified that regulators will not dictate how individual institutions should address these losses.

This backdrop comes as the 10-year JGB yield recently touched 3%, a three-decade high, fueled by intensifying fiscal concerns and investor anticipation of further monetary tightening. Market consensus leans toward the Bank of Japan raising its policy rate to 1.25% on Friday.

Kato characterized the current key rate as still accommodative, expressing expectations for additional hikes down the line. He also voiced hope that the new cabinet led by Prime Minister Takako Hirai will enact policies conducive to sustainable national growth and financial market stability.

It was reported that Hirai retained core members of her cabinet in a reshuffle announced on Thursday, marking her first such reorganization since assuming office in October 2025. Analysts suggest the move aims to solidify her administration's footing amid persistently low approval ratings, partly by incorporating figures from the Japan Innovation Party, to better prepare for the upcoming autumn parliamentary session.