Japan’s Centenarian Bank Grapples with Global Rate Pressures

One of Japan's largest institutional investors Norinchukin Bank has announced plans to sell approximately 63 billion U.S. dollars in overseas bonds, primarily U.S. and European government bonds, to mitigate the risks associated with holding low-yield bonds amidst high interest rates in the United States and Europe.

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A man walks past the Bank of Japan in Tokyo, Japan, March 19, 2024. (Xinhua/Zhang Xiaoyu)

Century-old Japanese financial institution Norinchukin Bank has announced plans to sell approximately 10 trillion yen (about 63 billion U.S. dollars) in overseas bonds, primarily U.S. and European government bonds, by the end of the current fiscal year in March 2025, as it faces massive losses.

The move aims to mitigate the risks associated with holding low-yield bonds amidst high interest rates in the United States and Europe, and this decision is expected to convert the bank’s on-paper losses into actual losses, potentially increasing its net losses for the fiscal year to 1.5 trillion yen, according to local media reports.

Established in 1923, Norinchukin Bank is one of Japan’s largest institutional investors, primarily serving the nation’s agricultural, forestry, and fisheries cooperatives.

A spokesperson for the bank revealed in a recent interview that the bonds being sold constitute about one-sixth of its global investment portfolio. The sale is projected to triple the bank’s deficit forecast from its May predictions, with final losses dependent on the actual scale of the bond sales and prevailing market conditions.

The decision came after Norinchukin Bank last month projected a fiscal year deficit exceeding 500 billion yen due to its substantial holdings in overseas bonds.

Experts pointed out that the crisis stemmed from the prolonged high interest rates in the United States and Europe along with the delayed rate cuts by the U.S. Federal Reserve.

As of the end of March this year, the bank held approximately 23 trillion yen in foreign bonds, which made up 42 percent of its investment portfolio. The high interest rates have led to a significant drop in the valuation of previously issued bonds, sharply increasing the bank’s paper losses.

Norinchukin Bank President and Chief Executive Officer Kazuto Oku stated that U.S. interest rates are unlikely to decrease for a considerable time. “Depending on developments like the U.S. elections, we might further reduce our holdings of U.S. Treasuries,” he said.

Despite the substantial loss from selling the 10 trillion yen in foreign bonds, Oku assured that this would not exceed the bank’s retained earnings and would have a limited impact on its capital adequacy ratio. He expected a return to profitability in the fiscal year 2025 ending March 2026 with improved financial conditions and investment reallocation. However, Norinchukin Bank must accelerate its investment strategy adjustments.

Previously, the aggressive interest rate hikes by the U.S. Federal Reserve had negatively impacted several U.S. regional banks, causing international financial market turbulence with the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank in March 2023.

To diversify investment risks and avoid substantial future paper losses, Norinchukin Bank plans to increase investments in corporate and personal credit risks, including corporate bonds, stocks, collateralized loan obligations, and mortgage-backed securities. Moreover, the bank will gradually expand corporate lending and consider purchasing high-yield foreign bonds to replace lower-yield holdings.

“From now on, we will adhere to the basic principle of diversified investment. Even if it means lower profitability, we cannot revert to past practices,” Oku told the media.

Chief Cabinet Secretary of Japan Yoshimasa Hayashi told a press conference on Wednesday that the government would closely monitor Norinchukin Bank’s financial health and its implications for the financial system.

According to the Bank of Japan, or Japan’s central bank, Norinchukin Bank’s foreign bond holdings account for about 20 percent of the country’s total foreign bond assets. Local media reports suggested that as one of the major institutional investors in U.S. Treasuries, Norinchukin Bank’s large-scale bond sales could set a precedent, impacting the broader market.

Xinhua News Agency

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