As US inflation shows signs of slowing, the prediction of a "soft landing" for the economy has become a prevalent view on Wall Street. However, Japan’s third-largest bank, Mizuho, warns that if this prediction proves wrong, it could lead to short-term market volatility. To brace for this, Mizuho is stockpiling easily sellable assets like US Treasuries.
Kenya Koshimizu, Co-Head of Global Markets at Mizuho, has expressed concerns over the market's confidence in US policymakers’ ability to curb inflation without triggering a recession. In preparation for potential shocks, Mizuho is acquiring US Treasuries and other assets that offer easier liquidation or can hedge against stock price drops. The bank has reduced its holdings of mortgage-backed securities and other credit products from its $280 billion securities portfolio to focus on more liquid assets.
Following the Bank of Japan’s recent interest rate hikes, there has been speculation about whether Japanese banks, including Mizuho, would sell part of their $4.4 trillion in overseas assets. However, Koshimizu points out that Japanese banks already have sufficient yen reserves, minimizing the likelihood of repatriating funds on a large scale.
Mizuho remains optimistic about Japan's long-term economic outlook, anticipating that the Bank of Japan will eventually raise policy rates to around 2%. With the recovery of manufacturing activity and the end of deflation, Japanese assets might become more attractive. Despite short-term volatility, Japanese stocks are seen as favorable for long-term investment.
In Japan’s sovereign bond market, as the Bank of Japan scales back its massive bond-buying program, Japanese banks are expected to become primary buyers. Mizuho currently holds 13.5 trillion yen ($91 billion) in Japanese government bonds, mostly short-term discount notes, alongside 17.2 trillion yen ($115.9 billion) in foreign bonds, predominantly US securities. Although it’s still early for large-scale purchases of Japanese government bonds, Mizuho might consider tactical entries into the market if conditions in the US worsen, potentially affecting the yields on Japanese bonds.
