In times of economic and financial prosperity, skeptics always try to anticipate who will be the next canary in the mine, that is, what will be the warning signal that brings about some shock or market adjustment. It is true that analysts often identify a range of potential risks in order to hedge against black swans or other unexpected events, and Today all attention is on the actions of the Fed and the ECB. However, Very few contemplated that the next canary could sing from the land of the rising sun.
It happens that in the last hours One of the main Japanese banks, Norinchukin, reported that it will liquidate more than $63 billion in US Treasury bonds and European bonds to cover huge unrealized losses.
Who would have thought that the Nochu, as it is known Japan’s fifth largest bank with more than $840 billion in assets, would be the proverbial canary in the Japanese coal mine. According to the Nikkei news holding, Norinchukin Bank will sell more than 10 trillion yen (about $63 billion) of its holdings of US and European government bonds during the fiscal year ending in March 2025, with the aim of curbing its losses from betting on low-yielding foreign bonds – a major cause of its balance sheet deterioration – and reduce the risks associated with holding foreign government bonds.
While Japanese interest rates have barely budged following the Bank of Japan’s (BoJ) first rate hike in decades in April, the move is already turning into a cascade in the form of huge losses for Japanese banks. who have been hit twice as many due to their offshore debt holdings that until 2021 were considered risk-free, blew up in front of everyone.
According to Nikkei, Nochu’s net losses for the year ending March 2025, which were thought to exceed 500 billion yen, would now rise to 1.5 trillion yen with the bond sales. “We plan to sell low-yield foreign bonds amounting to 10 trillion yen or more”the CEO of Bank Norinchukin told Nikkei, Kazuto Oku, an amount slightly higher than US$63,000 million. Oku noted that the bank recognized the need to dramatically change its portfolio management to reduce unrealized losses on its bonds, which amounted to about 2.2 trillion yen at the end of March. He explained the bank’s intention to shift its investments by saying they were going to reduce sovereign interest rate risk and diversify into assets that take on corporate and individual credit risk.
Effect of US and European rates and bond prices
All this was born, or rather, is exacerbated, with the increases in interest rates in the US and Europe and the consequent fall in sovereign bond prices. This reduced the value of the high-priced, low-yielding foreign bonds that Norinchukin had bought years earlier, causing his losses to increase. So having no other options, as American banks well do, Nochu has no choice but to undertake an orderly liquidation of tens of billions of bonds now, while they are still liquid and highly priced, in the hope of avoid a disorderly liquidation and, much worse, in a few months when the bond market cools.
What are the numbers like in this mess? At the end of March, Norinchukin had approximately 23 trillion yen in foreign bonds (about $150 billion), representing 42% of total assets under management (56 trillion yen).
To get a brief idea of the magnitude of this, according to the BoJ, outstanding foreign bonds held by depository financial institutions amounted to 117 trillion yen at the end of March, and Norinchukin, which is a major institutional investor in Japan, owns up to 20% of that total. The million-dollar question is whether once Nochu starts selling, the rest will not want to be left behind and will join the liquidation.
The reasons for the Japanese megabank
But why will you start selling now? It’s very simple, because The Japanese megabank now believes that interest rate cuts in the US and Europe will likely take longer than previously thought, so it will try to significantly reduce its unrealized losses by selling foreign bonds in fiscal 2024. Therefore, Norinchukin plans to sell more than 10 trillion yen in foreign bonds.
For Nochu to sell 10 billion yen is like an elephant in a bazaar. And even though the megabank distracts by pointing out that they are studying diversifying the asset portfolio, once it starts selling bonds, Nochu will be lucky if it manages to make a small profit when all the other Japanese banks react, do not stand still and go out. sell.
The fear is that this will not only be concentrated in the banks because they fear that the cascade of liquidations will extend since according to the US Treasury Department. Japanese investors held $1.18 trillion in U.S. government bonds in March, the largest share among foreign holders. Therefore, it goes without saying that Norinchukin’s sell-off could have a considerable effect on the US bond market. Especially now that everyone already has this information.
According to Nikkei, Norinchukin Bank is considering raising 1.2 trillion yen to shore up its finances and has already started talks with Japan Agricultural Cooperatives, one of its main investors, and others. Of course, one may wonder who in their right mind would lend money to the bank to plug an even bigger hole that is about to open.
Now we have to wait when the Nochu starts selling and unleashes the avalanche of sales. The story is just beginning.
Source: Ambito
