TeaHe died There were many reasons for Silicon Valley Bank. But at the center of it was the institution’s bond portfolio, which declined in value as interest rates rose. Little wonder, then, that analysts and investors are scrambling to locate similar hoards elsewhere. A shocking discovery is in Japan. Investment institutions there have accumulated vast reserves of domestic and foreign long-maturity bonds.
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These bond holdings have already declined in value due to a combination of sales and revaluations that occur when rates rise – a potential known as “duration risk”. Long-term foreign-bond holdings by “other financial corporations,” a category that includes insurance firms, investment organizations and pension funds, reached $1.5 trillion in June, the most recent figure available, up from their level at the end of June. is down some $293bn. 2021.
Norinchukin Bank, a Japanese investment firm, is one of the holders of such bonds. The company has been a sizeable buyer of collateralized-loan obligations, the bundling of secured loans into a single product. The value of its bond portfolio has been eroded by rising rates from ¥36trn ($293bn) in March last year to ¥28trn in December. Japan Post Bank, a savings bank in which the Japanese government owns about a third, is another exposed institution. Foreign securities have grown from essentially zero in 2007 to 35% of the firm’s total holdings.
Customers of these institutions are less likely to fly than svb‘S. The race in Silicon Valley was led by jittery venture capitalists. Japan Post Bank has an army of individual depositors across the country, with about 120 million accounts. Norinchukin Bank’s customers, who are mostly agricultural cooperatives, also seem less likely to flee than excitable tech types.
But there is a risk of currency movements. As noted by Brad Satter of the think-tank Council on Foreign Relations, rising US interest rates have made hedging against currency risk more expensive. This is true for both investors and the companies and governments from whom they once bought the bonds. Japanese investors sold more than $165 billion in foreign long-term bonds last year, the largest disposal on record. Rising rates have left bond issuers around the world paying more to borrow. The disappearance of previously trusted buyers only adds to the pain.
And large holdings of foreign financial assets are just one element of risk. Since the bursting of the country’s infamous land and stock bubble in the early 1990s, Japanese interest rates have been at rock-bottom levels by global standards. Three decades of relative economic stagnation and occasional deflation have meant very low bond yields, which has prompted financial institutions to hold long-dated yen-denominated bonds for moderately high returns. This magnifies the amount of damage even slightly tighter monetary policy can do.
But it is becoming increasingly unclear whether Japan will in fact be able to maintain its low rate outlook. Consumer-price inflation rose to 4.3% in January; Pay at large firms is set to grow at its fastest pace in decades. A one-percentage-point rate hike would shave more than 9 trillion yen off the value of the banks’ yen-denominated bonds. The unrealized losses in large banks would be as high as around 10% of their capital. On them shinkin Banks, of the credit union type, will still be higher, around 30%.
Last year the Bank of Japan (bheyJay) Published analysis suggests that these losses will be offset by the changing value of liabilities. The interest rates that banks offer to depositors tend to rise much more slowly than the interest rates charged on new loans, relieving the pressure. For regional banks, the analysis suggested, the two forces would almost completely offset each other. But the central bank’s calculations depend on assumptions about the loyalty of depositors. Higher rates are bound to erode the value of banks’ portfolios; The viscosity of the depositors has not been tested recently.
bheyJay Insists that there is still no chance of a rate hike. But recent inflationary pressures and growth in the rest of the world mean that this line is becoming increasingly difficult to maintain. The mere prospect of an increase is already having an effect on foreign-bond holdings, as investors dispose of assets. And as Japanese institutions change from buyer to seller, global corporate and government bond-issuers are losing reliable customers, sometimes precisely when they need them most.
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