Mizuho Financial Group Inc. is ditching illiquid assets and shortening the average maturity of its Japanese and other sovereign bond holdings so it’s positioned to deploy money after expected policy changes over the next 12 months.

Japan’s third-biggest bank is “curling up” with its investments, Kenya Koshimizu, co-head of Mizuho’s global markets company, said in an interview. He expects central bank actions in the US and Japan to spark big market moves, and wants to be prepared.

“We should be ready for any eventuality,” said Koshimizu, who oversees Mizuho’s securities portfolio. “We don’t build up big positions in anything.” He expects the Bank of Japan to change its ultra-easy policy within a year or so, given the country’s economic strength. In the US, he said the end of aggressive rate hikes by the Federal Reserve is “well within the realm of possibility, so we will wait to see its timing.”

Mizuho’s securities holdings totaled about 37 trillion yen ($264 billion) as of the end of March, according to an investor presentation. The figure includes investments not managed by Koshimizu’s global markets team and securities held for other purposes.

Mizuho and rival Japanese banks were stung when the Federal Reserve started aggressive rate hikes last year, causing unrealized losses on their foreign bond holdings to balloon. They realized some of these losses in the latest quarter to clean up their balance sheets ahead of the new fiscal year that started in April.

Mizuho said in 2019 it rebuilt its portfolio after it realized losses on its foreign bond holdings and had to slash its net income forecast.

The biggest risk facing the market currently is “extreme uncertainty” over how successful the Fed will be in taming inflation without causing a severe slowdown in the US economy, according to Koshimizu. Data coming out between July and September in the world’s biggest economy will be important in determining the course of the Fed’s actions, he said.

In Japan, he sees the central bank likely to raise the cap on its yield curve control program or eliminate it altogether, provided there aren’t any big shocks to the financial system like a severe US recession. He said these actions could be followed by the termination of the negative interest rate policy.

“The momentum, or shall I say, dynamism of the Japanese economy and prices has started to change,” he said. “It’s possible that the monetary policy will adjust accordingly sooner or later.”

Koshimizu said Mizuho is ready to bet again once it’s clear where the markets are heading. “There are possibilities that the market situations will change significantly,” he said. “When such trends emerge, we will put our positions in that direction.”

Here are more comments from Koshimizu:

• He’s bullish on Japanese stocks given their low valuation and the country’s economic health.
• At around 4%, current yields on US Treasuries are attractive, though much higher short-term rates makes funding costs too expensive for such investments.

--With assistance from Cormac Mullen.