US economy

Japan’s Norinchukin plans capital raise after higher rates hit bond holdings

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A surge in US and European interest rates has hit the vast overseas investment portfolio of Norinchukin, prompting the Japanese agricultural lender to plan a capital raise of ¥1.2tn ($7.7bn).

At a news conference on Wednesday, Norinchukin, which manages the savings of farmers and fisherman from Hokkaido to Okinawa, warned that it would incur a loss of about ¥500bn in the current financial year and pledged to review the way it balanced out its investment risks. 

Paper losses from its bond holdings ballooned to ¥2.2tn as of the end of March from ¥1.7tn a year earlier, and a profit of ¥959.8bn in 2021, as its investments were hit by the rapid pace of rate hikes in the US and Europe as central banks sought to tame inflation. 

Against the backdrop of years of low and even negative yields on Japanese fixed-income securities, Norinchukin has voraciously bought US Treasuries and other global assets, becoming one of the world’s biggest buyers of collateralised-loan obligations at various points in recent years.

But the Japanese lender, like Silicon Valley Bank, suffered big hits to its holding of US Treasury bonds, whose value has fallen as yields have risen.

“The bank’s financial volatility is above the peer average,” said Tomoya Suzuki, senior analyst at Moody’s Ratings. “Higher-for-longer interest rates expose the bank to continued volatility in its financial performance, limiting its buffers for absorbing unexpected losses,” he added. 

With a common equity Tier-1 capital ratio of 16.4 per cent, however, Norinchukin said there was no concern about its underlying financial strength.

“We need to strategically reshuffle our portfolio of assets under management to ensure long-term profitability,” a spokesperson said in explaining its plan to raise capital.

A big focus for investors is the extent to which Norinchukin will sell off US and European government bonds and instead buy Japanese government bonds. Yields on the latter have risen after the Bank of Japan raised interest rates in March for the first time since 2007.

On Wednesday, the yield on Japan’s 10-year JGBs climbed above 1 per cent for the first time in 11 years amid rising expectations that the BoJ will reduce its purchases of government debt.

Norinchukin has been burnt in the past by its aggressive investment policy. It had to raise emergency funds at the peak of the global financial crisis, tapping its agricultural, fishery and forestry co-operative members for the equivalent of tens of billions of dollars, after placing big bets on asset-backed securities based on US subprime mortgages. 


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