According to recent information, Bank of Yokohama Ltd., Japan's largest regional bank, has stated that it is ready to re-enter the domestic bond market on a large scale once the peak interest rates set by the Bank of Japan approach. Hitoshi Inoue, who oversees market operations at the bank, noted that the central bank is likely to maintain interest rates this month, but it is “highly probable” that rates will be raised to 0.75% in December or January of next year. He also revealed that the Bank of Yokohama continues to adopt a cautious approach towards Japanese government bonds.

Inoue's primary expectation is that the Bank of Japan will increase interest rates in the fiscal year starting April 2026 and take further action in the subsequent years, ultimately pushing peak rates to 1.25%. He predicts that this series of measures could drive the yield on 10-year Japanese government bonds to around 2%. On Wednesday, the benchmark yield for 10-year Japanese government bonds in the Tokyo market reported at 1.65%.

Inoue stated in an interview that Japan's banking sector has struggled for years due to extremely low interest rates that significantly compressed loan margins. “The situation is now completely the opposite,” he emphasized. “In an environment with interest rates, our core investment portfolio will consist of sovereign bonds and Japanese and U.S. stock index investments.”

Currently, the Bank of Japan remains the largest holder of Japanese government bonds. As this bank gradually reduces its bond purchases to exit monetary stimulus policies, market participants are closely watching whether commercial banks will re-enter the government bond market. Following the aggressive monetary easing policy launched by the Bank of Japan in 2013, Japanese banks, including the Bank of Yokohama, increased their holdings of foreign bonds and other assets to compensate for the declining domestic bond yields. Now, market watchers are also keen to see if Japanese investors will sell off these overseas assets to bring funds back home.

The Bank of Yokohama, headquartered in the port city of Yokohama near Tokyo, is a core subsidiary of Yokohama Financial Group Inc. As of the end of June, the financial group's securities portfolio was approximately 21 trillion yen (equivalent to 140 billion USD), excluding assets planned to be held to maturity. About half of the holdings consist of Japanese government bonds and other yen-denominated debt.

Inoue shared that in the first half of the fiscal year ending in September, the Bank of Yokohama began "small-scale" purchases of Japanese government bonds, primarily focusing on the two-year and five-year bonds, as their yields have become attractive. Year-to-date, the yield on two-year Japanese government bonds has risen by about 33 basis points to around 0.935%, while the five-year yield has increased by approximately 48 basis points to about 1.225%. He stated that when the timing is right, the bank will primarily purchase short- and medium-term government bonds to match its liability structure, which predominantly consists of relatively short-term customer deposits.

Inoue also indicated that in the second half of the fiscal year ending in March 2026, the bank will maintain its current investment stance. He mentioned that if inflation and the economic situation align with the Bank of Japan's expectations, and if the central bank's policy rate reaches the anticipated peak, the Bank of Yokohama will “fully” increase its holdings of Japanese government bonds.

Identified as a long-term executive, Inoue joined the Bank of Yokohama in 1997 and was appointed to oversee market operations in April of this year. According to the bank’s official website, it has a history dating back to 1920 when a major bank in Yokohama faced financial difficulties. In response, local businesses requested the government to establish a new bank to assist depositors and stabilize the local economy, leading to the creation of the Bank of Yokohama. Inoue stated that even if the bank begins to significantly increase its holdings of Japanese government bonds in the future, it will retain some U.S. Treasury bonds in its asset portfolio as a safe asset. He revealed that currently, the cost of dollar financing for Japanese investors remains high; therefore, the bank’s purchases of U.S. Treasury bonds are mainly to achieve short-term capital gains. Additionally, the Bank of Yokohama will maintain its stable position in collateralized loan obligations (CLOs). Inoue considers CLOs to be “high-quality assets with stable returns.”