Last October, when the wounds from the March 2023 bank failures - which surpassed the global financial crisis in total assets and which sparked the latest Fed intervention, setting the market's nadir over the past 16 months - were still fresh, we made a non-consensus prediction: we said that since the Fed has once again backstopped the US financial system, "The next bank failure will be in Japan." This prediction only got warmer two months later when, inexplicably, Japan's Norinchukin bank, best known as Japan's CLO whale, was quietly added to the list of counterparties for the Fed's Standing Repo Facility, a/k/a the Fed's foreign bank bailout slush fund.
"We plan to sell low-yield [foreign] bonds in the amount of 10 trillion yen or more," Norinchukin Bank CEO Kazuto Oku told Nikkei, an amount just above $60 billion.
The bank, which previously was best known for being one of the world's most aggressive CLO investors - buys securities out of pension funds deposited by agriculture, forestry, and fisheries concerns.
Facing a problem that is very familiar to all US banks, Oku said the bank "Acknowledged the need to drastically change its portfolio management" to reduce unrealized losses on its bonds, which totaled roughly 2.2 trillion yen as of the end of March.
Oku explained bank's intention to shift its investments, saying, "We will reduce [sovereign] interest rate risk and diversify into assets that take on corporate and individual credit risk." Now, if Nochu, as it is affectionately known by bankruptcy lawyers, was a US bank circa one year ago, it would not have to sell anything: it could just pledge all of its sharply depreciated bonds at the Fed's BTFP facility, and get a par value for them.
To get some sense of the scale, according to the Bank of Japan, outstanding foreign bonds held by depositary financial institutions amounted to 117 trillion yen as of the end of March.
Norinchukin, which is a major institutional investor in Japan, holds as much as 20% of the total on its own! And those asking, yes: once Nochu begins selling, all others will have to join the club! But why start the selling now? Because, as we warned last October when we predicted that the next bank crisis will be in Japan, the Japanese mega-bank now believes interest rate cuts in the U.S. and Europe are likely to take longer than it previously expected, it will try to significantly cut its unrealized losses by selling foreign bonds in fiscal 2024.
The rest of the story is filler: in attempt to divert attention from the 10 trillion yen elephant in the room, the Nikkei then wastes time discussing the bank's other "Alternatives" to wit: 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.
What are you talking about? What diversification? Once the selling begins, the bank will be lucky if it can get even a fraction of the proceeds it hopes for.
It's not just banks: if and when the selling begins by a bank that holds 20% of all foreign bonds in Japan, the liquidation cascade will quickly spread to Mrs Watanabe.
Of course, the question of who in their right mind would lend the bank good money to plug an even bigger hole that is about to open up, is anyone's guess.
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