(Bloomberg) — Mizuho Financial Group Inc. expects the Bank of Japan to pick up the pace of interest-rate hikes, with the next one coming as soon as next month, as the weak yen and inflation prompt the central bank to act more quickly.
Kenya Koshimizu, co-head of the global markets division that manages the bank’s ¥41 trillion ($257 billion) securities portfolio, also anticipates longer-term rates to keep rising after 10-year Japanese government bond yields hit a 30-year high this week.
The upshot for Japan’s third-largest lender is that it will still avoid buying the nation’s bonds apart from inflation-linked notes and those that mature within a year, said Koshimizu. “We’ve limited the the amount of interest-rate risk we take, and so our portfolio’s duration is very short,” he said in an interview in Tokyo.
His remarks underscore how many — though not all — Japanese financial institutions remain reluctant to wade back into the nation’s bond market as rates rise and inflation persists.
Koshimizu said the likelihood of a rate increase in September is “quite high,” and the BOJ may shorten the interval of policy action to once every three months from roughly six months currently.
“And once the BOJ moves to a three-month pace, it would be difficult to slow back down,” he said, noting that the current policy rate at 1% remains “still deeply in negative territory” when stripping out the impact of inflation, which is running at around 1.6%.
Traders and economists are watching whether the BOJ will step up rate hikes as pressure on the yen and consumer prices persist. One former government official even suggested hiking at every policy meeting. The yen has resumed sliding despite last month’s joint intervention by the US and Japan, their first coordination to prop up the currency since 1998.
“The significance of the joint intervention was considerable,” reflecting a shared view that further weakening of the yen is undesirable, Koshimizu said. “There is also the fact that the yen’s weakness is partly attributable to Japan’s accommodative monetary policy.”
Prime Minister Sanae Takaichi’s government is supportive of a near-term rate hike, with the next move likely either in September or October, people familiar with the matter said last week. Koshimizu said he won’t rule out the possibility of two increases by the end of the year, which would lift the policy rate to 1.5%.
Traders are pricing in a 78% chance of a hike when the BOJ’s board sets policy on Sept. 18, according to overnight-indexed swaps on Tuesday.
Koshimizu said it’s difficult to predict the BOJ’s terminal rate because it depends on how Japan’s economy evolves. The central bank’s estimate of a neutral rate between 1% and 2.5% could also rise as a result of productivity gains from a capital spending boom, he said.
Since joining Mizuho’s predecessor in 1990, Koshimizu, 59, has spent most of his career in market operations. He assumed the current position in 2022.
Koshimizu said Mizuho is maintaining a “conservative” stance on investment in Japanese government bonds because benchmark 10-year yields — now at around 2.9% — are still low given the country’s nominal growth rate of about 4%.
The bank held about ¥20.6 trillion of JGBs at the end of June, but the bulk is made up of short-term securities maturing within a year. The average remaining period to maturity of Mizuho’s JGB holdings was less than a year as of June.
“Given global structural changes and the investment boom, the risks to inflation are still skewed to the upside,” Koshimizu said. “So we plan to actively invest in inflation-linked government bonds.”
Many in the market have attributed the weakness in Japanese bonds to Takaichi’s fiscal policy, including a decision to reduce the sales tax on food for two years. But Koshimizu doesn’t expect to see a sharp selloff like the one in the UK when then-Prime Minister Liz Truss unveiled unfunded tax cuts.
“There is substantial underlying demand for Japanese government bonds once yields rise to levels more consistent with the nominal growth rate,” Koshimizu said. JGBs are likely to find willing buyers among big Japanese banks, overseas investors and even households, he added.
Koshimizu is optimistic about Japan’s growth outlook, saying the economy is going through a transformation that hasn’t been seen in decades, boosting corporate activity and loan demand. For that reason, he said Japanese stocks are “very attractive assets” and the bank is investing in index funds.
“Global structural changes are expected to have a positive impact on the Japanese economy,” he said. “That said, these sorts of periods also tend to bring greater volatility to financial markets.”
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