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Japan big banks retreat further from government bond market

TOKYO -- Major Japanese banks traded the least amount of bonds on record in August as the Bank of Japan's unprecedented asset-purchasing program continued to grind down liquidity in the government debt market.

Large banks, including three megabanks -- Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Mizuho Bank -- traded a combined roughly 1.7 trillion yen ($16.7 billion) in government and corporate bonds in August, hitting a new low for the first time since May, according to a report released Tuesday by the Japan Securities Dealers Association. This was the first time that the monthly report on trends in bond transactions by investor type showed an amount below 2 trillion yen for the major banks.

A main catalyst is the dwindling supply of Japanese government bonds caused by the central bank's large volume purchases under its monetary easing policy. "Megabanks continue to move away from JGBs as their liquidity has decreased," an official at Tokai Tokyo Securities said.

The BOJ announced in late July that it would conduct a comprehensive review of its extraordinary monetary easing policy in a September policy board meeting. This sparked concerns in the JGB market that the central bank may reconsider its JGB-purchasing operations, which caused wild fluctuations in the bonds' yields. The heightened uncertainty made big banks fearful of buying at the wrong time and incurring paper losses. This led those banks to hold back on JGB trading in August.

Regional banks appear to have been caught off guard by the wild gyrations in yields. They were net buyers in government and corporate bonds by more than 500 billion yen in July, but their selling exceeded buying by more than 100 billion yen in August. "They may have been forced to realize losses as yields on their JGB holdings went up," said an analyst at a Japanese brokerage.

Meanwhile, major banks, regional banks and shinkin banks -- or credit associations -- all bought more ultralong-dated JGBs than they sold in August as their yields rose marginally. This reflects a tough situation where they now have to toil to squeeze profits out of JGBs by grabbing higher yields even if potential gains are fairly limited.

Thanks to the BOJ's aggressive buying and its negative rate policy, newly issued 10-year JGBs have been trading at negative yields.

(Nikkei)

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