TOKYO Japan's Norinchukin Bank said on Wednesday it plans to sell around ¥10 trillion of US and European government bonds to stem losses from bets that went awry when overseas interest rates stayed higher for longer than expected.

The country's main financial institution for farm, forestry and fishery cooperatives also now expects a net loss of around ¥1.5 trillion this financial year, three times its previous estimate, a spokesperson for the bank said.

The plan comes after Norinchukin, hit hard by valuation losses, said in May it was looking at raising ¥1.2 trillion to shore up its capital - which would include tapping its cooperatives for funds - and would restructure its portfolio to replace low-yielding securities with high-yielding ones.

Norinchukin's bond portfolio had unrealised losses of ¥2.2 trillion at the end of the financial year in March after high interest rates in the US and Europe gutted the value of the sovereign bonds it had acquired when interest rates were lower.

By selling these low-yield sovereign bonds, Norinchukin is aiming to reduce interest rate risk, the spokesperson said.

Norihiro Yamaguchi, a senior Japan economist at Oxford Economics, said he thought the huge unrealised losses on foreign bonds were unique to Norinchukin Bank and not indicative of a wider systemic problem.

"When US yields rose sharply in 2022 most Japanese banks cut their losses on unprofitable foreign bonds, allowing them to ensure profits at their core businesses remained robust," he said, adding that Norinchukin was hesitant to take a hit on bonds then.

Norinchukin is unusual among Japanese banks in its reliance on its investment portfolio to generate profit. Years of ultra-low interest rates in Japan saw it look abroad for returns and it piled into US treasuries and other assets worldwide.

It has also been among the largest investors in collateralised loan obligations (CLOs) in the world in recent years, holding ¥7.4 trillion worth of the securities at the end of March.

The Norinchukin spokesperson said the bank was looking at reinvesting some of the proceeds of the sale in asset classes other than sovereign bonds such as private equity, stocks as well as securitised products such as CLOs and mortgage-backed securities.

Japan's Chief Cabinet Secretary Yoshimasa Hayashi told a regular briefing that the government would closely monitor the situation for any potential impact on Norinchukin's affiliate financial institutions but added that he believed the bank's financial health was "sufficient".

The sale is expected to make up between a fifth and sixth of Norinchukin's portfolio, which totals around ¥56 trillion, the spokesperson said, adding that the exact value of bonds sold and the final loss will depend on market conditions.

Norinchukin has been caught out by its overseas securities exposure in the past. Due to the 2007-2009 global financial crisis, it had to raise ¥1.9 trillion in capital from member banks following losses from investments in securitised products.

The news of the planned bond sale was first reported by the Nikkei business daily.

  - Reuters