Japan’s Norinchukin Bank, often called the country’s CLO whale, plans to sell $63 billion in U.S. and European government bonds by March 2025 to cover massive losses.
We made a non-consensus prediction last October, when the market was still suffering from the March 2023 bank failures, which had total assets that exceeded the global financial crisis, prompted the latest Fed intervention, and set the record low for the past 16 months for the market. We predicted that, because the Fed had once again backstopped the US financial system, “the next bank failure will be in Japan.”
Two months later, this projection became even more optimistic when Japan’s Norinchukin bank—often referred to as the country’s CLO whale—was surreptitiously added to the Fed’s Standing Repo Facility counterparties list, also known as the Fed’s foreign bank bailout slush fund.
As per Nikkei, Norinchukin Bank “will sell more than 10 trillion yen ($63 billion) of its holdings of U.S. and European government bonds during the year ending March 2025 as it aims to stem its losses from bets on low-yield foreign bonds, a main cause of its deteriorating balance sheet, and lower the risks associated with holding foreign government bonds.” If that was the first, and as of yet unproven, sign that something was very wrong at one of Japan’s largest banks (Norinchukin is the country’s fifth largest bank with $840 billion in assets), then today’s canary stepped on a neutron bomb inside the Japanese coal mine.
As the FDIC constantly reminds us, US banks are still sitting on over half a trillion dollars in unrealized losses as a result of the sharp increase in interest rates that has blown up the banks’ long-duration fixed-income holdings, sending them trading far below par and forcing banks (and the Fed, see BTFP) to find inventive ways to brush these enormous losses under the rug. So you see, what’s happened in Japan is not all that different from what’s happening in the US.
The BOJ only recently raised rates for the first time in decades in April, so even though Japanese rates have hardly changed, the move is already having a significant negative impact on domestic banks, which have already suffered twice as much as they would have otherwise due to their holdings of offshore debt, which was seen as risk-free until 2021 and then crashed two years ago, ending the longest bull market since the early 1980s.
Now for Norinchukin: the Nikkei reports that the bond sales will cause the company’s net loss for the year ending in March 2025, which was previously expected to exceed 500 billion yen, to reach 1.5 trillion yen.
CEO of Norinchukin Bank Kazuto Oku told Nikkei, “We plan to sell low-yield [foreign] bonds for 10 trillion yen or more,” which is somewhat more than $60 billion.
The bank, which was formerly well-known for being among the most active global investors in CLOs, uses pension funds deposited by companies involved in agriculture, forestry, and fisheries to purchase securities.
To lessen unrealized losses on its bonds, which stood at almost 2.2 trillion yen as of the end of March, Oku said the bank “acknowledged the need to drastically change its portfolio management” in response to a situation that is extremely recognizable to all US banks. The bank’s goal to change its investments was clarified by Oku, who said, “We will reduce [sovereign] interest rate risk and diversify into assets that take on corporate and individual credit risk.”
Now, if Nochu—as bankruptcy attorneys lovingly refer to it—was a US bank around a year ago, it wouldn’t need to sell anything since it could just pledge all of its severely depreciated bonds at the Fed’s BTFP facility and receive par value in return.
Sadly, Nochu is Japanese rather than American, and the year is 2024 rather than 2023 when the catastrophic events of 2023 were meant to be finished. Though it should be better, things are only becoming worse. Although it won’t be necessary for frequent readers, Nikkei provides the following brief introduction for newcomers: “Interest rates in the U.S. and Europe have risen and bond prices are down. This reduced the value of high-priced (low-yielding) foreign bonds that Norinchukin purchased in the past, causing its paper losses to swell.”
Having exhausted all other options, Nochu is attempting to prevent a chaotic liquidation and worse—a bond market freeze in a few months—by conducting an orderly liquidation of tens of billions of securities now, when they are still marketable and fetch a premium price.
Indeed, the Japanese rates canary is massive: as of the end of March, 42% of Norinchukin’s total assets under management (56 trillion yen) were foreign bonds valued at roughly 23 trillion yen, or $150 billion.
To give you an idea of the size, the Bank of Japan reports that as of the end of March, depositary financial institutions owned 117 trillion yen in outstanding foreign bonds. Holding as much as 20% of the total on its own is Norinchukin, a significant Japanese institutional investor! To answer your question, yes, everyone else will need to join the club once Nochu starts selling!
However, why begin selling now? Because the Japanese mega-bank now believes interest rate reductions in the U.S. and Europe are likely to take longer than it previously projected, as we warned last October when we forecasted that Japan will experience the next financial crisis, it will attempt to considerably reduce its unrealized losses by selling foreign bonds in fiscal 2024.
Consequently, in addition to its regular trading operations, Norinchukin intends to sell foreign bonds worth over 10 trillion yen.
The remainder of the report is filler, as the Nikkei wastes time detailing the bank’s other “alternatives” to wit: to draw attention away from the 10 trillion yen elephant in the room.
THE COMPANY IS NOW CONSIDERING INVESTMENT ALTERNATIVES, INCLUDING EQUITIES, CORPORATE BONDS, CORPORATE LOANS AND PRIVATE EQUITY, AS WELL AS SECURITIZED PRODUCTS SUCH AS CORPORATE LOAN-BACKED SECURITIES AND MORTGAGE-BACKED SECURITIES. BY DIVERSIFYING ITS PORTFOLIO, IT AIMS TO PREVENT UNREALIZED LOSSES FROM EXPANDING TO THE POINT WHERE THEY BECOME A CONCERN FOR MANAGEMENT. IT WILL ALSO TRY TO REPLACE SOME LOW-YIELDING FOREIGN GOVERNMENT DEBT WITH OTHER SUCH BONDS OFFERING HIGHER INTEREST RATES.
What topic are you discussing? Diversification—what is it? The bank will be fortunate to receive even a small portion of the anticipated proceeds once the selling starts, as other banks won’t be passively waiting to witness how drastically Nochu reprices the market.
Furthermore, it’s not just banks that will be affected: Mrs. Watanabe will be caught up in the liquidation cascade as soon as a bank that owns 20% of all foreign bonds in Japan starts to sell. As of March, Japanese investors held the greatest portion of foreign holders of U.S. government bonds, amounting to $1.18 trillion, according to the U.S. Treasury Department.
Although it should go without saying, the Nikkei nonetheless states that “Massive sales by Norinchukin could have a sizable effect on the U.S. bond market.”
And now that we know what’s going on, it will not be long until everyone else outpaces Norinchukin.
Even worse, the bank’s financial results for the period ending in March 2025 will “deteriorate significantly as a result of the huge divestment of foreign bonds and turn paper losses into real ones,” as it will no longer be able to conceal its fixed income losses through accounting sleight of hand. Although Norinchukin estimated its ultimate loss at over 500 billion yen as of May, it is now anticipated to approach 1.5 trillion yen.
For additional background, let me mention that in the year that ended in March 2009, immediately following the global financial crisis, Norinchukin reported a total loss of almost 570 billion yen as a result of the impairment of securitized products. This fiscal year’s projected loss is predicted to surpass the previous record by around 1 trillion yen. However, according to Oku, recording the losses in the fiscal year that ends in March of next year will “improve [the bank’s] finances and portfolio, thus enabling it to move into the black in the period ending in March 2026.”
Warning: it won’t. For this reason, the bank is currently rushing to pass the suffering along to even bigger idiots, namely, “investors.”
The Nikkei reports that Norinchukin Bank is thinking of raising 1.2 trillion yen to strengthen its balance sheet. One of its primary investors, Japan Agricultural Cooperatives, and other parties have already begun talks. Naturally, it’s anybody’s guess as to who in their right mind would give the bank large sums of money to close an even greater hole that is likely to open.
However, since the bank has decided to go the liquidation path, it won’t stop it from doing what it needs to: and as these blinking red headlines from Bloomberg just proved, once the selling wave starts, it won’t stop:
- *NORINCHUKIN TO SELL US, EUROPEAN SOVEREIGN BONDS GRADUALLY
- *NORINCHUKIN ALSO WEIGHS LOCAL, AND OVERSEAS BONDS, PROJECT FINANCE
- *NORINCHUKIN EYES ASSETS INCLUDING CLOS, STOCKS AFTER BOND LOSS
This is known as a firesale, but – drum roll please – it’s a “gradual” one, as that’s reportedly how they work in Japan.
Fortunately, the one thing that no one has to anticipate is what comes next: as the fantastic film Margin Call so brilliantly explained, you have three options once the music stops: i) finish first, ii) be smarter, or iii) cheat. Norinchukin, a company based in Japan, has determined that it is time to liquidate ahead of everyone else. We wonder how this specific news will be received by “everyone else”.
Recently, GreatGameIndia reported that, according to the Times of India, India’s central bank, the RBI, has transferred 100 tons of gold from the UK to domestic vaults due to an increase in stock abroad.
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