Rakuten Bank's JGB Strategy in a Shifting BOJ Policy Landscape

The Bank of Japan's (BOJ) gradual exit from negative interest rates and its shift toward monetary normalization have forced Japanese financial institutions to recalibrate their risk exposure. Nowhere is this recalibration more evident than at Rakuten Bank, a deposit-driven institution navigating the dual pressures of rising yields and policy uncertainty. As the BOJ's quantitative tightening (QT) program accelerates, the bank's strategic restraint in Japanese Government Bond (JGB) purchases underscores a broader industry trend: the redefinition of risk-return trade-offs in a post-zero-yield era.

Rakuten Bank's Cautious Approach to JGBs

Rakuten Bank's Q2 2025 JGB portfolio—¥617 billion in holdings intended to be held until maturity—reflects a deliberate avoidance of aggressive bond market participation. CEO Tomotaka Torin has emphasized that the bank will refrain from new JGB purchases until it observes “at least one or two additional rate hikes” by the BOJ. This strategy is rooted in the bank's risk management framework, which prioritizes operational resilience amid volatile bond markets. With the 10-year JGB yield surging to 1.59% in May 2025 (a 17-year high), the bank is acutely aware of the valuation risks associated with rising yields.

The decision to hold back is not unique to Rakuten. Japanese insurers, the second-largest holders of JGBs, have cut their portfolios by ¥1.35 trillion in Q1 2025, driven by regulatory shifts and demographic pressures. For deposit-driven institutions like Rakuten, the challenge lies in balancing the need for yield generation with the risks of capital erosion in a tightening environment. The bank's total deposits have nearly tripled to ¥11.7 trillion since 2020, creating both opportunities and constraints. With ultra-low interest rate mortgages becoming less viable, Rakuten is instead focusing on stabilizing its loan portfolio, which grew to ¥4.76 trillion by June 2025.

Broader Trends in Japanese Banking

The BOJ's tapering of its yield curve control (YCC) program has triggered a structural repricing of Japan's bond market. By reducing monthly JGB purchases from ¥6 trillion to ¥3 trillion, the central bank has allowed market forces to dictate yields, a stark departure from its previous dominance. This shift has had cascading effects: the 30-year JGB yield hit a 30-year high of 3.20% in May 2025, while the yen appreciated by over 8% year-to-date, disrupting traditional carry trade dynamics.

Japanese banks, long accustomed to ultra-low yields, are now forced to adopt more dynamic portfolio strategies. Shorter-duration JGBs—such as the 5-year bond, which yielded 1.1% in May 2025—have become more attractive as a hedge against rate risk. However, the broader industry remains cautious. The Ministry of Finance's potential reduction in super-long-dated JGB issuance further complicates the landscape, as it could tighten the long end of the yield curve and exacerbate fiscal risks for a country with a debt-to-GDP ratio of 260%.

Global Implications for Investors

The normalization of Japan's bond market is reshaping global capital flows. The unwinding of the yen carry trade—where Japanese investors borrowed low-yielding yen to invest in higher-yielding foreign assets—has redirected capital back to Japan. This has contributed to the rise in U.S. Treasury yields, which reached 4.36% in July 2025, as demand for foreign bonds wanes. For global investors, the implications are twofold:

1. Yield Sensitivity in Portfolio Construction: The surge in JGB yields has made Japan a more attractive asset class for yield-starved investors. However, the risk of further BOJ rate hikes and fiscal imbalances necessitates a nuanced approach. Investors should consider blending JGBs with U.S. Treasuries and European bonds to diversify fiscal risks while capturing yield differentials.

2. Currency and Carry Trade Dynamics: The yen's appreciation has added complexity to global fixed-income strategies. Investors with exposure to yen-hedged equities in export-driven sectors (e.g., automotive, technology) may benefit from Japan's export boom, but must also hedge against currency volatility.

Strategic Recommendations for Yield-Sensitive Investors

As Japan's monetary transition unfolds, investors must adopt a yield-sensitive positioning that balances opportunity and risk. Here are three key strategies:

1. Diversify Duration Exposure: Allocate to shorter-duration JGBs (e.g., 5- to 10-year maturities) to mitigate interest rate risk while capturing rising yields. Pair this with U.S. Treasury Inflation-Protected Securities (TIPS) to hedge against inflation uncertainty.

2. Monitor Policy Lags: The BOJ's normalization is outpacing the U.S. Federal Reserve's cautious approach. Investors should watch for divergences in policy trajectories, which could create arbitrage opportunities in currency and bond markets.

3. Hedge Currency Volatility: Given the yen's sensitivity to carry trade flows, investors should use forward contracts or options to manage exposure. This is particularly critical for those with long-duration foreign bond holdings.

Conclusion

Rakuten Bank's JGB strategy exemplifies the recalibration underway in Japan's financial sector. As the BOJ continues its normalization path, the interplay between rising yields, fiscal constraints, and global capital flows will shape investment outcomes. For global investors, the key lies in adopting a flexible, yield-sensitive approach that accounts for both the opportunities and risks of Japan's evolving monetary landscape. In an era where policy divergence and inflation normalization dominate, agility—and a willingness to rethink traditional asset allocations—will be paramount.