SVB FALLOUT WON’T AFFECT JAPAN

SVB FALLOUT – Japan is a big owner of foreign government bonds. The Silicon Valley Bank debacle has highlighted the risks posed by rising interest rates—but the country’s financial institutions will likely avoid similar fallout despite mountainous Treasury holdings.

Japanese banks and insurers have long been key buyers of foreign bonds, looking abroad to juice returns since interest rates at home have been close to zero for so long. Japan is the top foreign owner of the U.S. Treasury bonds—outweighing China—with total holdings of nearly $1.1 trillion. As of the end of 2022, Japan owned around 281 trillion yen, the equivalent of $2.1 trillion, of foreign debt securities, according to preliminary estimates by the government. Japan’s foreign currency reserves account for much of it—it has nearly $1 trillion in foreign securities—but financial institutions make up much of the rest.

Some Japanese banks, in particular, own a lot of foreign bonds. Japan Post Bank 7182 -3.51%decrease; red down-pointing triangle had around 25 trillion yen of foreign bonds as of December, and another 53 trillion yen parked in investment trusts mainly invested in foreign bonds. The government owns around a third of the bank’s parent company. Privately held Norinchukin Bank, a lender primarily serving farmers and fishermen, had $229 billion of foreign bonds as of March last year. The bank has been an aggressive global investor—a significant buyer of collateralized loan obligations, or CLOs, investment vehicles that sometimes package risky corporate loans together.

Japan’s foreign debt securities holdings

The fall of SVB has spotlighted losses in banks’ bond portfolios caused by rapidly rising interest rates in the U.S. and elsewhere. Some Japanese banks are feeling the pain too. Norinchukin, for example, had around 1.8 trillion yen of net unrealized losses on foreign bonds as of December. Wall Street Journal 5-Year Digital Subscription says foreign currency interest rates contributed to 1.7 trillion yen of unrealized loss at the end of last year. Norinchukin’s total assets clock in at around 100 trillion yen, with a full 227 trillion yen at Japan Post Bank.

But Japanese banks should largely be able to avoid the same fate as Silicon Valley Bank. Apart from mounting unrealized losses on its bond portfolios, the California-based lender also suffered from its concentrated depositor base: heavy on tech companies, with big deposit amounts way over deposit insurance limits.

The tech downturn meant that previously high-rolling tech firms and startups, which had been making—and raising—money hand over fist, were suddenly not depositing much cash anymore. And with their businesses already under pressure, tech sector depositors fled the bank in a hurry when hints of mark-to-market losses began to emerge from SVB—in turn forcing the bank to sell more bonds at a loss to try to meet withdrawals.

SVB FALLOUT – Barrons Subscription 5-Year Digital

The funding structure should be more stable for most Japanese banks. Japan Post Bank, for example, has 120 million deposit accounts due to its roots in the post office. Norinchukin’s deposit base is mainly from the agricultural and fishery industries—cyclical industries, to be sure, but still far less volatile than the hard-charging, excess-prone U.S. tech sector. While Japanese banks do have a lot of money parked in bonds, foreign securities are still only about 4.4% of total banking sector assets, according to figures from the Bank of Japan.

Japanese banks that went big outside Japan over the past several years will feel the pain of rising interest rates. But with a more diversified deposit base than U.S. lenders like SVB and First Republic—and fewer flighty tech founders—they will probably mostly muddle through.