TOKYO - Sumitomo Mitsui Financial Group, Japan's second-largest banking group, will begin raising its allocation to long-duration ‍Japanese government bonds ‍if yields rise and settle higher, its CEO said.

"If the 10-year yield ​rises a bit further and becomes embedded around that level, we'd be at the stage of gradually building ⁠out the portfolio with longer durations," Toru Nakashima said in an interview with Reuters last week.

"But ⁠it may ‌still take a little while."

His comments indicated that Japanese government debt is becoming more attractive after offering negligible returns during Japan's decades of deflation and ⁠the seven years in which the 10-year rate was held near zero as part of the Bank of Japan's "yield-curve control" policy.

The yield on benchmark 10-year Japanese government bonds reached an 18-year high of 1.97% on December 8, fuelled by concerns about Prime Minister Sanae ⁠Takaichi's debt-funded stimulus package and bets ​that the BOJ will raise rates at its monetary policy meeting this week.

Since then, the 10-year yield has hovered ‍at just below a 2% threshold.

According to a Reuters poll, a majority of economists expect the BOJ to raise rates this ​week, with another increase on the cards by next September.

"In historical or global terms, the 2% level is not all that high," Nakashima said. "For the time being I don't think there's reason to be too concerned."

But the Takaichi administration's perceived fiscal largesse - instituting a stimulus package that includes handouts and tax breaks funded by additional borrowing - has pushed borrowing costs up and the value of the yen down since October.

"If the government doesn't maintain fiscal discipline, there's a chance that all of a sudden that 2% passes by 3% and hits 4%," Nakashima ⁠said. "We have to be careful of that."

Currently only a ‌fraction of SMFG's banking unit's 10.6 trillion yen ($68.44 billion) in JGB holdings are made up of bonds with durations of 10 years and up.

"Our fundamental position at present is not ‌to take ⁠risk on our bond portfolio and stick to extremely short durations," Nakashima said.

($1 = 154.8700 yen)

(Reporting by Okasaka ⁠Kentaro and Miho Uranaka, Writing by Anton Bridge; Editing by Thomas Derpinghaus)