According to the Zhongtong Finance APP, Mitsubishi UFJ Financial Group stated that when the Japanese government bond yield reaches 1.2%, it will consider reallocating more of its $488 billion securities investment portfolio into this asset because the company expects the Bank of Japan to continue raising interest rates.

Hiroyuki Seki, head of Mitsubishi UFJ's financial market business, stated that when the 10-year government bond yield and overnight index swap rate reach this level, Japan's largest bank will consider 'comprehensive investment' in domestic sovereign bonds. Seki mentioned that the bank may transfer 5 to 10 trillion yen (35 billion to 70 billion dollars) from central bank reserves to bonds. Currently, the 10-year Japanese government bond yield is slightly below 0.9%.

With the Bank of Japan starting to raise interest rates and reduce bond holdings, global traders are closely watching for signs of Japanese financial institutions making significant purchases of Japanese bonds again. 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 as early as this year.

Seki stated in an interview, 'As the stock market and foreign exchange market stabilize, we believe that the policy interest rate could be raised to 0.5% as early as December or January next year.'

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

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

"From the current level, there is still greater room for interest rate hikes," Seki said.

As of the time of publication, the yield on Japan's ten-year government bonds is 0.867%. Despite the Bank of Japan raising rates on July 31, the yield has been declining since reaching 1.1% in July, due to the decline in US government bond yields.

One way that Mitsubishi UFJ Financial Group and other Japanese banks may be able to alleviate global investors' concerns about large-scale outflows of foreign assets is by using their yen reserves held at the Bank of Japan to provide funding for purchases. If Japanese financial institutions begin to repatriate funds, this could disrupt the already volatile foreign exchange market and put pressure on US government bonds and other foreign bonds.

Seki added that the average duration of Mitsubishi UFJ Financial Group's holdings of Japanese government bonds (excluding maturing bonds) may be extended from the current 1.1 years to approximately 3 years.

Energy sector trading

Seki, who also serves as head of sales and trading at Mitsubishi UFJ Financial Group, stated that the bank will seize the growth opportunity in the Japanese electricity trading market.

Last month, the company announced that it would begin providing execution and clearing services for Japanese electricity futures, making it the first major bank to join domestic exchanges covered by overseas competitors.

Seki said: "Predictability of electricity prices is crucial to promote clean energy investment. However, the futures market has not played a sufficient role in suppressing price volatility risk."

With Japan's growing demand for renewable energy and seasonal fluctuations stimulating volatility and arbitrage opportunities, it is expected that the deregulation of the Japanese electricity market in 2016 will greatly increase the demand for price hedging.

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

Seki said that using the Tokyo Commodity Exchange would allow Japanese companies to minimize the exchange rate risk and higher interest rates they face when trading on the EEX. He added that the bank has about 20 employees responsible for executing and clearing services for electricity futures trading.

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