Japan’s Norinchukin Bank To Liquidate $63 Billion In Bonds To Cover Massive Unrealized Losses

In October last year, with the aftermath of the March 2023 bank failures still impacting the financial landscape, we predicted that the next significant bank failure would occur in Japan, following the Fed’s intervention to stabilize the US financial system. This prediction seemed more plausible two months later when Norinchukin Bank, Japan’s fifth-largest bank, was added to the Fed's Standing Repo Facility list, signaling potential underlying issues.

Today, this concern has materialized as Norinchukin Bank plans to sell over $63 billion in U.S. and European government bonds by March 2025 to address significant losses from low-yield foreign bonds. These losses have deteriorated the bank's balance sheet, necessitating a reduction in foreign bond holdings to manage risk and stabilize finances.

Similar to the situation in the U.S., where banks are grappling with over half a trillion dollars in unrealized losses due to rising interest rates, Norinchukin’s challenges are compounded by its substantial holdings in foreign debt, which was once considered risk-free but has now led to significant losses.

Norinchukin's net loss for the fiscal year ending March 2025, initially projected to exceed 500 billion yen, is now expected to escalate to around 1.5 trillion yen due to these bond sales. CEO Kazuto Oku stated the bank's intention to offload over 10 trillion yen in low-yield foreign bonds and diversify into assets with corporate and individual credit risk.

Unlike U.S. banks that can utilize the Fed’s BTFP facility to mitigate losses, Norinchukin must navigate this liquidation independently. The rising interest rates in the U.S. and Europe have devalued high-priced, low-yield bonds, exacerbating the bank's financial woes.

With approximately 23 trillion yen in foreign bonds, accounting for 42% of its 56 trillion yen in assets, Norinchukin's significant liquidation is likely to trigger a broader sell-off in the market. The bank holds a substantial portion of foreign bonds in Japan, and its decision to sell could prompt other banks to follow suit.

Norinchukin anticipates prolonged interest rate cuts in the U.S. and Europe, prompting the decision to sell foreign bonds in fiscal 2024 to curtail unrealized losses. The bank is also exploring other investment options, including equities, corporate bonds, loans, and securitized products, to diversify its portfolio and mitigate risk.

However, this strategic shift may lead to substantial financial deterioration, turning paper losses into real ones and worsening the bank's fiscal situation. Norinchukin is also considering raising 1.2 trillion yen to bolster its finances, although finding investors willing to support this endeavor might be challenging.

As Norinchukin embarks on this gradual liquidation of foreign bonds, it remains to be seen how the market and other financial institutions will react to this significant move.

By: Michael Figueroa