After the collapse of Japanese government bonds, Japan’s second-largest bank made a statement: ready to buy the dip and double its holdings!

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As Japan’s second largest bank, Sumitomo Mitsui Financial Group plans to aggressively rebuild its domestic sovereign debt holdings once market yields stabilize. The bank’s Global Markets Head, Arihiro Nagata, said they are prepared to double the current size of their Japanese government bond portfolio from ¥10.6 trillion (approx. $67 billion). This statement signals the financial giant is shifting its investment strategy from foreign bonds back to Japanese domestic bonds.

This Tuesday, the Japanese bond market suffered a fierce selloff, with long-term yields soaring to record highs. Concerns over Prime Minister Sanae Takaichi’s fiscal policy ahead of the February 8 election, combined with the Bank of Japan’s reduction in large-scale bond purchases, led to intense market volatility. On Wednesday, Japanese bond yields retreated from their highs, with the 20-year government bond yield falling 10 basis points to 3.245%. The benchmark 10-year bond yield also dropped 5 basis points to 2.290%.

Despite market turmoil, Arihiro Nagata said in an interview that once the surge in yields ends, the bank will fully return to the Japanese government bond market. He revealed that Sumitomo Mitsui has already begun buying some 30-year bonds, judging their prices to be close to fair value. However, he also emphasized that due to inflation risks and uncertainty before the election, the bank remains cautious about large-scale purchases at present.

In addition to their bond strategy, Nagata offered several noteworthy predictions for the Japanese market. He expects the Nikkei 225 index to break through 60,000 points by the end of the year, and the yen exchange rate could fall to ¥180 against the US dollar in the next few years. These forecasts highlight the firm’s expectation for a dramatic revaluation of Japanese asset prices.

Returning to the Japanese Bond Market

According to Bloomberg, Arihiro Nagata spoke openly about a shift in investment direction in the interview: “I used to be very enthusiastic about foreign bond investments, but not anymore. The focus now is on Japanese government bonds (JGBs).” He stated that Japanese government bonds will become the centerpiece of Sumitomo Mitsui Bank’s core investment portfolio. Currently, the bank holds about ¥12 trillion in foreign bonds.

Although the bank’s holdings of Japanese government bonds are mainly short-term bills, with an average duration of just 1.7 years, and the size once peaked at ¥15.8 trillion in March 2022, Nagata said the scale of future rebuilding will “far exceed this level.”

Despite the surge in long-term yields causing the bond market to plunge, Nagata noted that the yield on 30-year bonds was already near fair value earlier this week. Previously, on Tuesday, yields on these bonds soared over 25 basis points at one point. However, with investors repricing inflation risks that may arise from Takaichi and the main opposition parties’ policies, yields could climb further, meaning the bank has not yet entered the market in full force.

For the benchmark yield’s path, Nagata predicts the 10-year Japanese government bond yield will break through 2.5% by the end of the year, and considers fair value to be between 2.5% and 3%.

Japanese banks have long been reducing their domestic sovereign debt holdings and have been cautious about new purchases as yields continue to rise, since newly bought bills could quickly lose value. Sumitomo Mitsui’s statement marks a significant signal from a major institutional investor in the midst of market turmoil, hinting that after prolonged selloff, institutional funds are waiting for an opportunity to reallocate domestic assets.

According to a previous Wallstreetcn article, the Japanese government bond market has faced a historic crash due to structural imbalances. Goldman Sachs bluntly stated that verbal intervention has failed, and the Bank of Japan is being compelled toward the only “logical endgame”—restarting unlimited bond purchases. Yet, while this “money-printing market rescue” can suppress yields, it will likely cause the yen exchange rate to break through the 160 threshold, leaving the central bank in a painful dilemma between defending bonds and defending the currency.

Central Bank Policy and Yen Movement

The bond market selloff has complicated the Bank of Japan’s policy path. Nagata believes there’s a “substantial chance” the BOJ will hike rates three times this year, higher than the broadly anticipated two times among economists and traders, mainly to deal with yen weakness. If the U.S.-Japan interest rate gap widens and further weakens the yen, the BOJ may hike rates as early as April and two more times by year end, doubling policy rates to 1.5%. He expects a terminal rate of 2%, but if the Fed begins hikes in 2027, it could go higher.

On the Federal Reserve, Nagata forecasts two rate cuts this year in response to Donald Trump’s push for lower borrowing costs. But he warns that excessive cuts could force the Fed to sharply hike rates again in 2027 to combat resurgent inflation.

He also pointed out that given the strong U.S. economy, the yen’s decline against the dollar will be hard to reverse. “If it hits 180 within three years, I wouldn’t be surprised,” Nagata said. He suggests yen weakness is driven by real-economy capital flows—such as cross-border M&A and retail buying of US equity funds—as well as productivity differences between the two countries, with government intervention likely to have only limited effect. However, if the yen falls to 180, Japan may self-correct via lower manufacturing costs.

Despite uncertainties in global trade, Nagata remains optimistic about this year’s global economic outlook and is particularly bullish on Japanese equities.

He predicts the Nikkei 225 index will continue rising from currently less than 53,000 points and break through 60,000 by year end, setting a new record. “I take a positive attitude toward our risk exposure in Japanese stocks,” Nagata said. This signals that even as the bond market adjusts, Japan’s major financial institutions remain confident in domestic equity assets.

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