An improvement in their balance sheets has allowed Japan's banks, traditionally the core buyers of Japanese government bonds (JGB), to reduce their exposure to JGBs, a move that may drive up yields and attract non-traditional investors.
In the last fiscal year, top banks made big strides in cleaning up bad loans, meaning they face less pressure to put money in market operations to bolster a weak capital base.
Instead, they have turned their attention to controlling portfolio risk rather than chasing capital gains. "The treasury departments at banks aren't being pushed to go after profits as much as before," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi Securities. "As bad loans diminished, their profit prospects improved greatly, making it unnecessary for them to take interest risks by extending JGB durations just to (make gains on) yields," she said.
Data released by the Japan Securities Dealers' Association on Wednesday showed Japanese banks sold a net 680 billion yen ($6.28 billion) of JGBs in September. They were net JGB sellers in four of the six months of the fiscal year started in March.