Core Viewpoint - Japan's largest banks, Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG), plan to increase their holdings of Japanese government bonds (JGBs) as rising interest rates offer higher returns, despite facing unrealized losses on existing bond portfolios [1][4]. Group 1: Bank Strategies and Holdings - MUFG reported unrealized losses of 200 billion yen ($1.3 billion) on its bond portfolio at the end of the year, up from 40 billion yen at the end of March, indicating a significant increase in losses due to rising yields [4]. - SMFG's unrealized losses on JGBs more than doubled to 98 billion yen over nine months to the end of December, reflecting a similar trend in bond valuation losses [5]. - Both banks have historically reduced their JGB holdings over the past decade due to the Bank of Japan's ultra-low interest rate policy, which resulted in low returns [1][4]. Group 2: Market Conditions and Future Outlook - A sharp increase in JGB yields since November, driven by government spending plans, initially impacted bond values, but recent debt auctions have shown resilient demand, with 30-year JGB yields falling 32 basis points since their peak of 3.88% on January 20 [2]. - MUFG's managing director indicated a cautious approach to rebuilding JGB positions, suggesting that long-term interest rates may be peaking [3]. - Analysts believe that substantial purchases of longer-duration bonds may be delayed due to potential further rate hikes by the Bank of Japan and concerns regarding Japan's large debt burden [7].