Mitsubishi UFJ Financial Group: BOJ may raise interest rates again as early as December, with yields reaching 1.2% to "comprehensively invest" in Japanese bonds

According to the Zhitong Finance and Economics APP, Mitsubishi UFJ Financial Group stated that when Japan's government bond yield reaches 1.2%, it will consider shifting more of its $488 billion securities investment portfolio to this asset, as the company expects the Bank of Japan to continue raising interest rates.

Hiroyuki Seki, head of market operations at Mitsubishi UFJ Financial Group, stated that when the 10-year government bond yield and overnight index swap reach this level, Japan's largest bank will consider "comprehensive investment" in domestic sovereign bonds. Seki stated that the bank may transfer ¥5-10 trillion ($350-700 billion) from central bank reserves to bonds. Currently, the 10-year Japanese government bond yield is slightly below 0.9%.

As the Bank of Japan begins to raise interest rates and reduce bond holdings, global traders are closely watching for signs of Japanese financial institutions re-entering the Japanese bond market. Due to rising inflation, Mitsubishi UFJ Financial Group expects Bank of Japan Governor Haruhiko Kuroda to make steady progress in policy normalization, with the next rate hike possibly taking place as early as this year.

Seki stated in an interview, "With the stock and currency markets stabilizing, we believe the policy rate could be raised to 0.5% as early as December or January next year."

It is understood that Seki, who oversees Mitsubishi UFJ Financial Group's ¥70 trillion securities investment portfolio, correctly predicted the end of Japan's negative interest rate policy in March and the subsequent market turmoil caused by rate hikes in July.

Seki suggested that the Bank of Japan may consider raising the benchmark interest rate to a "neutral" rate, estimated to be at least 1%. He added that since the policy rate has not exceeded 0.5% this century, the market has not fully digested the central bank's actions.

"From the current level, there is still room for interest rates to rise further," Seki said.

As of the time of writing, Japan's 10-year government bond yield is 0.867%. Despite the Bank of Japan raising rates on July 31, the yield has been declining since reaching 1.1% in July, dragged down by falling U.S. Treasury yields.

One way for Japanese banks like Mitsubishi UFJ Financial Group to potentially alleviate global investors' concerns about massive outflows from foreign assets is for these companies to use their yen reserves held at the Bank of Japan to fund purchases. If Japanese financial institutions start repatriating funds domestically, this could disrupt the already volatile foreign exchange market and put pressure on U.S. Treasuries and other foreign bonds.

Seki added that the average remaining maturity of Mitsubishi UFJ Financial Group's Japanese government bonds (excluding maturing bonds) may extend from the current 1.1 years to around 3 years.

Energy Sector Trading

Seki, who also serves as head of sales and trading at Mitsubishi UFJ Financial Group, mentioned that the bank will seize the opportunity for growth in the Japanese electricity trading market Last month, the company announced that it would start providing trading execution and clearing services for Japanese electricity futures, making it the first major bank to join domestic exchanges covered by overseas competitors.

Seki said, "In order to promote clean energy investment, the predictability of electricity prices is crucial. However, the futures market has not fully played its role in suppressing price volatility risks."

With Japan's growing demand for renewable energy and seasonal fluctuations stimulating volatility and arbitrage opportunities, it is expected that the demand for price hedging in the Japanese electricity market, which was liberalized in 2016, will surge.

However, most of the Japanese electricity futures trading takes place on the European Energy Exchange (EEX), where many overseas participants, from oil giants to financial institutions, are members of the exchange. The operator of the domestic securities exchange in Japan, the Tokyo Commodity Exchange, has struggled to increase trading volume and match the scale.

Seki stated that using the Tokyo Commodity Exchange would allow Japanese companies to minimize exchange rate risks and higher interest rates faced when trading on the EEX. He added that the bank has around 20 employees responsible for electricity futures trading execution and clearing services.

Seki also mentioned that Mitsubishi UFJ Financial Group plans to participate in the spot electricity market. The bank has decided to acquire a 49% stake in enechain, a subsidiary of a startup company that handles physical transactions