(Bloomberg) -- A bank operating in Japan’s least populated area is doing something that may have global repercussions if its peers do the same: the lender is planning to return to the nation’s bonds in a big way as interest rates rise.
Like many of its competitors, San-in Godo Bank Ltd. had purchased US debt in recent years to earn much higher returns than Japanese government bonds, but it suffered losses after the US Federal Reserve started to aggressively raise interest rates in 2022. It made little sense for banks to buy JGBs when benchmark 10-year yields were hovering around zero, but their recent climb to above 1% at one point has made the bonds more desirable.
“JGBs are going to be our mainstay,” said Toru Yamasaki, president of San-in Godo, in an interview. “If we can buy JGBs, they are better for a regional bank like ours” than foreign debt, he said, adding that his bank once had ¥1 trillion ($7 billion) worth of domestic notes, but its holdings are now less than half of that.
Global investors are closely watching whether Japanese banks will buy more domestic securities and reduce their presence in overseas markets, after the Bank of Japan ended its super-easy monetary policy and raised interest rates twice this year. The Japanese lenders have good reason to attract attention: from the biggest firms including Mitsubishi UFJ Financial Group Inc. to smaller regional lenders like San-in Godo, the sector manages securities portfolios with a total value of around $1.9 trillion, according to data from the Japanese Bankers Association. That’s more than the annual economic output of Australia.
San-in Godo is seeking to rebuild its securities holdings back to ¥2 trillion through March 2027, according to its three-year business plan that started in April. Its investment securities portfolio has shrunk by 20% since 2021 to about ¥1.6 trillion as of March as it sold US Treasuries and other bonds at a loss in recent years.
Yamasaki said the bank isn’t buying JGBs at a “full throttle” yet since their yields are still rising, but that may change.
“We would miss buying opportunities if we are too concerned about the exact timing,” he said. “And we are not so worried about paper losses on JGBs as long as our yen funding is sound.”
San-in Godo, based in Shimane Prefecture in western Japan, is one of a growing number of regional banks trying to hire experts to bolster their securities portfolio management. It’s a big challenge though to attract market veterans there, about 600 kilometers (475 miles) from Tokyo.
Of the 14 front-office staff in its markets team, two were hired from other banks, but both are originally from the region. “It would be so much easier to hire if we were in Tokyo,” Yamasaki said during the interview at the bank’s headquarters overlooking Lake Shinji, Japan’s seventh-biggest lake. Getting there means a flight from Tokyo of slightly more than an hour, then a 45-minute drive to the city.
Shimane is Japan’s second-least populated prefecture, showing the demographic hurdles the bank has had to overcome. San-in Godo also serves Tottori next to it, which is famed for its sand dunes but with the fewest residents among the nation’s 47 prefectures, a term much like states in the US.
The small number of potential clients hasn’t stopped it from projecting a record profit for the fourth year in a row this fiscal year through March 2025. Earnings growth has been driven by increased lending outside of its local market in more populated prefectures such as Hiroshima and Hyogo, home to the port city of Kobe.
The lender was the first regional bank to strike an alliance nearly five years ago with Nomura Holdings Inc. to sell financial products. The union has helped it increase revenues and cut costs in the brokerage business compared with before when a now-closed subsidiary handled those operations, Yamasaki said.
The bank has also been adding headcount in its structured finance business in Tokyo, which includes loans for property projects and leveraged buyouts. “We are planning more hires,” he said.
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