Tokyo: Japan’s largest banking groups are preparing to increase their exposure to Japanese Government Bonds (JGBs), marking a strategic shift even as their existing bond portfolios continue to suffer from growing unrealized losses caused by rising interest rates. The move reflects changing calculations within the banking sector as Japan exits an era of ultra-low rates and enters a more volatile but potentially rewarding yield environment.
For more than a decade, Japan’s megabanks steadily reduced their holdings of government debt, citing poor returns under the Bank of Japan’s prolonged monetary easing. However, recent comments from senior executives at top lenders such as Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG) indicate that this trend may now be reversing. With yields on long-term JGBs climbing to multi-year highs, banks are reassessing the role of government bonds in their balance sheets.
The renewed interest comes despite significant valuation losses already recorded on existing bond holdings. As yields rose sharply through late 2025, the market value of previously purchased low-yield bonds declined, leading to substantial unrealized losses. MUFG alone disclosed paper losses running into hundreds of billions of yen, while other major banks reported similar pressures on their investment portfolios. Although these losses do not immediately impact cash flow, they have raised concerns among investors and regulators.
Bank executives argue, however, that the current environment offers a more attractive risk-reward balance than in the past. With yields now at levels unseen for years, banks see an opportunity to lock in higher long-term returns, particularly if interest rates begin to stabilize. Some institutions have suggested they would gradually add to JGB holdings rather than make large, abrupt purchases, signaling a cautious but deliberate strategy.
The policy shift of the Bank of Japan is a key factor shaping this outlook. Since beginning its gradual tightening cycle in 2024, the central bank has lifted interest rates and loosened its grip on the bond market. This has improved lending margins for banks, boosting overall profitability and giving them greater capacity to absorb valuation swings in bond investments. Analysts note that stronger core earnings are helping banks tolerate short-term losses in anticipation of longer-term gains.
Fiscal policy has also played a role in recent market volatility. Expectations of increased government spending and heavier bond issuance unsettled markets in late 2025, pushing yields higher and prices lower. While this initially hurt banks’ bond portfolios, recent auctions have shown signs of stabilization, easing fears of disorderly moves in the JGB market and encouraging banks to re-enter cautiously.
The potential return of domestic banks as buyers of government debt could have wider implications for Japan’s financial system. Stronger demand from banks may help support bond prices, reduce yield volatility and stabilize the yen, which has been sensitive to shifts in monetary and fiscal policy expectations. At the same time, policymakers continue to stress the importance of fiscal discipline to prevent excessive pressure on interest rates.
As Japan navigates a new phase of monetary normalization, the decision by its biggest banks to increase JGB holdings highlights the delicate balancing act facing the financial sector. While risks remain from further rate hikes, banks appear increasingly willing to accept short-term volatility in exchange for higher returns in a post-ultra-low-rate Japan.