SVB's collapse drives concern over Japanese banks' exposure to US bonds

The troubles at Silicon Valley Bank and its subsequent collapse have driven investor attention to the heavy investment in US bonds by Japan’s lenders, casting a pall over their shares.  
 

SVB’s woes have been rooted in tens of billions of dollars it plowed into longer-term bonds, confident that rates would stay steady. Japanese banks have also stepped up investment in foreign debt over the past decade as outgoing Bank of Japan Governor Haruhiko Kuroda’s aggressive monetary easing crushed domestic yields.  

While there aren’t any alarm bells ringing over the health of Japan’s banking sector — with the size of foreign-debt investment significantly smaller than that for domestic securities — investors are nonetheless worried over potential losses. 

The Topix Bank Index tumbled more than 7% on Tuesday, bringing its losses over three sessions to nearly 16%. That dragged on the broader Topix index, which led the day’s declines in Asia by falling 3%. The MSCI Asia Pacific Index shed 1.3%. 

“It’s natural for equity investors to consider again the interest-rate risk of Japanese regional banks’ bond holdings,” said Michael Makdad, senior analyst at Morningstar. “I don’t think Japanese depositors face risk to their deposits in any case, but the share prices of the regional banks aren’t the same as their deposits.”

The value-at-risk of big Japanese banks’ dollar bond holdings has increased to 2.29 trillion yen ($17 billion) in April-June 2022, compared to 1.2 trillion yen in early 2014, according to BOJ data. Regional banks’ exposure almost doubled during the same period. The metrics measure how much losses they would suffer when interest rates rise by 200 basis points. 

The BOJ has said their interest-rate risk is well contained, at about 10% of capital for big banks and 5% for smaller regional banks.  

Chief Cabinet Secretary Hirokazu Matsuno also told reporters on Monday that the collapse of SVB is unlikely to cause significant issues for Japan’s financial system, saying there is “substantial liquidity and capital base.”

The yield on US 10-year Treasuries surged 236 basis points in 2022 amid aggressive tightening by the Fed to vanquish inflation. After a volatile two months at the start of the year, yields have tumbled in the past few sessions as the collapse of three US banks fueled speculation that the Fed will opt against big interest-rate increases.

The rise in interest rates led to losses at SVB and that has sparked worries that there may be other banks with similar problems, said Masao Muraki, global finance strategist at SMBC Nikko Securities.  

Yet for Japanese banks, interest risks from their domestic bond portfolio is a bigger threat, and analysts see limited damage given that the BOJ is unlikely to raise interests with the same vigor as the Fed.  

“US rates have risen to 5%, Japan’s bond yields have risen just to 0.5%, a completely different level of magnitude,” said Masahiro Yamaguchi, senior market analyst at SMBC Trust Bank. “I don’t think Japanese banks are cornered that much.”