MUFG Makes Tentative Purchase of 10-Year JGBs, Wary of Dual Fiscal and Monetary Risks
nashnova research
MUFG Bank began tentative purchases of 10-year Japanese government bonds around a 3.1% yield, but global-markets CEO Atsushi Yamashita warns that fiscal slippage and a behind-the-curve BOJ could push yields into the mid-to-high 3% range — the selloff may not be over.
Why is a major bank's "tentative" buy itself a signal?
MUFG spent years cutting long-dated JGB holdings. Average duration dropped from 3.1 years last September to 1.2 years this June. This means → the bank was actively retreating from interest-rate risk.
Now it is stepping back in at around 3.1%, calling it a "tentative buy." In plain terms = the price looks attractive enough to dip a toe, but not enough to dive in.
Yamashita expects 10-year yields to peak at roughly 3.2%, just above the 3.115% three-decade high hit earlier this month — close to the top, yet he concedes the risk has not fully cleared.
How much higher could yields go — and what are the two drivers?
Yamashita's risk scenario: yields reaching the mid-to-high 3% range. This means → materially above his 3.2% base case.
Driver one: fiscal. Japan carries the highest debt-to-GDP ratio among developed nations. Markets are watching whether PM Sanae Takaichi's year-end budget — especially temporary food-tax cuts — can hold fiscal discipline.
Driver two: monetary. Yamashita expects the BOJ to hike in December, then roughly every three months, lifting the terminal rate from 1.25% to about 2%. But if inflation worsens, the terminal rate could go higher. In plain terms = the most dangerous scenario is the BOJ falling behind the curve and being forced to catch up aggressively.
How does Yamashita view the fiscal risk?
He was blunt: "Fiscal policy should not rely too heavily on optimistic growth scenarios." This reflects concern that Tokyo funds spending plans by assuming rosy GDP growth.
He acknowledged that inflation-driven tax gains help, but stressed that "markets focus not just on where things stand, but where they are headed" — This means → even decent near-term numbers won't protect bonds if the market sees the long-run path as unsustainable.
He pointed to France as a cautionary tale: Paris faces the dilemma of rising debt-servicing costs alongside deficit control. Japan "will very likely face the same problem," he said.
Will overseas funds flow back to Japan?
Yamashita ruled out repatriating foreign assets to fund domestic bond purchases. In plain terms = even as MUFG adds yen bonds, it has no plans to sell overseas positions to make room.
If foreign-bond yields remain attractive after accounting for the end-point of the hiking cycle, MUFG still has room to add more foreign debt.
European sovereign exposure is limited; Yamashita sees current European bond volatility as country-specific fiscal and political issues, not a regional systemic crisis.
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