Norinchukin is a farming and fishing cooperative bank, which invests its balances in bonds. This practice is shared by other Japanese banks for whom lending margins became severely compressed by the BOJ’s negative interest rate policy.

The following is extracted from a Nikkie Asia report earlier today (18 June):

Norinchukin Bank will sell more than 10 trillion yen ($63 billion) of its holdings of U.S. and European government bonds during the year ending March 2025 as it aims to stem its losses from bets on low-yield foreign bonds, a main cause of its deteriorating balance sheet, and lower the risks associated with holding foreign government bonds. The Case Against the Fed Murray N. Rothbard Best Price: $2.05 Buy New $2.99 (as of 07:00 UTC - Details)

The company’s net loss for the year ending March 2025, which was previously forecast to top 500 billion yen, will rise to the 1.5 trillion yen level with the bond sales.

…The bank “acknowledged the need to drastically change its portfolio management” to reduce unrealized losses on its bonds, which totalled roughly 2.2 trillion yen as of the end of March. As of the end of March, Norinchukin had approximately 23 trillion yen of foreign bonds, amounting to 42% of its total 56 trillion yen of assets under management.

According to the Bank of Japan, outstanding foreign bonds held by depositary financial institutions amounted to 117 trillion yen as of the end of March. Norinchukin is a major institutional investor in Japan, holding roughly as much as 20% of the total on its own. Interest rates in the U.S. and Europe have risen and bond prices are down. This reduced the value of high-priced (low-yielding) foreign bonds that Norinchukin purchased in the past, causing its paper losses to swell.

…According to the U.S. Treasury Department, Japanese investors held $1.18 trillion of U.S. government bonds as of March, the largest slice among foreign holders. Massive sales by Norinchukin could have a sizable effect on the U.S. bond market.

Norinchukin Bank is considering raising 1.2 trillion yen to shore up its finances. It has already started discussions with Japan Agriculture Cooperatives, one of its main investors, and others.

It’s unrealized losses have already been reflected in the company’s equity ratio, and realizing those losses will not cause any change in the ratio. The bank said it will continue raising capital even if losses grow. It plans to hold a annual general meeting of representatives, analogous to an annual shareholders meeting, on Friday to seek the understanding of investors over the large losses expected this fiscal year and its policy of raising more cash.

Comment

Norinchukin is not alone in these troubles, but it is the first evidence of public problems in the Japanese banking system. Losses are bound to be significant throughout the banking system, where balance sheet leverage is as much as 20 times assets to equity. Clearly, the boards of all the other Japanese banks will be considering their position in light of Norinchukin’s announcement.

Doubtless, some bankers will adopt the three wise monkeys strategy: “See no evil, hear no evil…”. But speculation among investors selling and shorting suspected problem banks is bound to rise, and others will be forced to reveal their losses. At this stage, we can only say that the totality of losses in the Japanese banks must be extremely large, wiping out much of their capital. But it is probably too early to call out a full-scale Japanese banking crisis. Principles of Economics Ammous, Saifedean Best Price: $20.21 Buy New $20.52 (as of 09:52 UTC - Details)

Watching all this will be Japanese pension funds and insurance companies which have also bought foreign government bonds. They are already under pressure on their French holdings, and with the UK’s general election coming next month are bound to rethink their gilt and sterling exposure as well. But the big problem is likely to be for US Treasuries.

As Nikkei Asia points out, Japanese institutions own $1.18 trillion of US government bonds, and we can be almost certain that they will turn net sellers, particularly of duration. As well as China, everyone will now see that the two largest holders of US Treasuries are sellers, which is bound to tilt the yield curve positive and higher. It would be surprising if other foreign holders don’t turn sellers as well in a defensive action which could even spread to US institutions.

There is now an enhanced risk that bond losses around the world will increase, potentially undermining entire banking systems, and creating added difficulties for indebted governments and other debt zombies.

For those on the lookout for the modern equivalent of Austria’s Credit-Anstalt crisis of 1931, this could be it.

Reprinted with permission from MacleodFinance Substack.

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