- Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it.
- Holdings of Japanese government bonds by Japan’s banks equate to 900% of their tier one capital, compared with 25% for UK banks’ exposure to gilts.
- Mitsubishi UFG, the parent group whose principal banking unit is BTMU, is the fourth-biggest bank in the world ranked by deposits. Its lending base – at Y83tn – leaves it with Y42tn of excess deposits, nearly all of which is invested in JGBs.
Tuesday, December 4, 2012
Financial Times
The CEO of Bank of Tokyo-Mitsubishi has underlined the risk facing Japanese banks from their vast holdings of government bonds and said that the bank would struggle to reduce its exposure.
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Japan bank chief warns on bond exposure
ReplyDeleteFinancial Times
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The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure.
Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi[BTMU], admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it. “This is analysts’ main concern,” he told the Financial Times. “A default of JGBs would have a severe impact on us. But we need to be responsible to keep that market in order.”
According to data produced by the Bank for International Settlements, and published last week by the Bank of England, the holdings of JGBs by Japan’s banks equate to 900 per cent of their tier one capital, compared with about 25 per cent for UK banks’ exposure to gilts and 100 per cent for US banks’ exposure to US Treasuries.
Mr Hirano said he was “ready to mitigate the risks” but said that would mean tweaking the duration of the bonds it invests in rather than reducing the overall portfolio.
Japanese banks are by far the biggest holders of JGBs, so any move to sell down would destabilise the market.
Few commentators predict a Japanese default, though some investors have been predicting a sharp rise in yields for some time, which could force the country’s banks to take losses on their holdings of JGBs.
In fact, JGBs have rallied this year, pushing the yield on benchmark 10-year bonds to 0.72 per cent, against the average of 1.34 per cent over the past decade. “BTMU does not expect a major JGB crisis because more than 90 per cent are held by domestic institutions,” said BTMU, adding that in the light of regular stress-testing the bank was “not worried about a rise in interest rates”.
The International Monetary Fund warned of “a rising concentration of government bond risk in the domestic banking system”, in its global financial stability report in October.
Japanese government debt has been rising in recent years. But with JGBs now equivalent to nearly 250 per cent of GDP, the country is two and a half times more indebted than the US or UK and a third more than Greece, according to the BIS.
三菱東京ＵＦＪ銀行の平野信行頭取が、４０兆円の日本国債の保有は大きなリスクだけれど、それについてはなにもできないと認めた。国債の保有を減らしたくても、減らせない。リスクもあまり減っていかない。
ReplyDeleteなぜ、このようなことを、日本のメディアにではなく、ファイナンシャル・タイムズに話したのか。
なぜ、三菱東京ＵＦＪ銀行の広報は、国債はリスクではないと、頭取とは逆のことを言うのか。
Hedge funds say shorting Japan will work
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Why would a hedge fund manager be interested in adult diapers? They are a clue to what growing numbers of hedge funds are now seeing as the next big trade: the bursting of Japan’s bond bubble.
ReplyDeleteThis year, sales of adult diapers in Japan eclipsed sales of infant ones for the first time; a neat statistic that captures the huge demographic challenge the country faces – one big factor of several that bears believe are behind a crisis set to break in the coming months.
“What did Bernie Madoff’s titanic Ponzi scheme teach the world?” asks Kyle Bass, a Dallas-based hedge fund manager who has garnered a wide following for his contrarian – sometimes borderline apocalyptic – views, in his letter to investors this month.
“A key takeaway should have been that you can make outlandish promises for the future as long as you maintain one key ingredient: more victims entering the scheme than exiting.”
His point is simple: social security costs in Japan have been rising steadily. The retirement age is 65. And the peak years for Japan’s birth rate were the four from 1947.
Japan is finally facing its reckoning, Mr Bass says, driven by insuperable demographic forces and triggered by a worsening current account – which has for the first time slipped into deficit – after years of widening debt to gross domestic product and falling government revenues.
And yet, we have been here before. Betting against Japan has been a persistent hedge fund favourite.
David Einhorn, founder of Greenlight Capital, for example, has been short Japan one way or another since 2009, and shorting the yen has been a failed trade for many of the world’s most seasoned macro hedge funds four years running.
As if to underscore the point, Japanese government bond yields reached historic lows this week. As SocGen analysts have written, expecting them to rise seems tantamount to “chasing rainbows”.
Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley, describes an “unshakeable JGB absorption structure”, whereby the gap between loans and deposits at banks is filled by government bonds. Current data suggest the banks have plenty of room to buy more, he says. “We see no indication at all that the desire to buy JGBs on dips is weakening.”
All of which is not deterring new hedge fund bear converts.
“We believe that things really are now set to shift,” says Christopher Rigg, a life-long Japan expert who runs a new dedicated Japan-short fund at UK-based activist Audley Capital. “We think it is all coming together now.”
Mr Rigg’s thesis is more moderate than Mr Bass’s: he says a catalyst for change will be the Japanese elections, set for December 16, which look set to usher in Shinzo Abe, head of the Liberal Democratic party, as prime minister.
ReplyDelete“Abe is defined by his desire for growth,” Mr Rigg notes. “It’s quite obvious that he wants the Bank of Japan to be more aggressive.”
With the governor and two deputy governors of the BoJ set to be replaced early next year, an Abe administration could lead to a permanently more dovish BoJ, Mr Rigg says, which would be likely to break new ground in quantitative easing by buying foreign bonds.
Mr Rigg expects such a development could push JGB yields as high as 2 per cent – nowhere near the 6 or 7 per cent catastrophists see but enough to make short sellers huge profits.
“There are some people who look at the debt dynamics of Japan and go ‘oh boy’ – people who think this is a Greek-type situation with yields at 6 per cent. I’m not saying that it can’t happen but we don’t think it will,” he says.
And nor, crucially, do hedge funds need it to in order to make big returns.
Audley tells potential investors in the Japan fund to expect triple-digit percentage gains – based on current futures prices against Japanese debt – if its thesis is proved correct.
It is precisely the asymmetry of the Japan trade, as much as the fundamentals behind it, that is now making it so attractive to hedge funds once more.
“Japan’s situation is such that the question is no longer ‘why bet against it?’ but ‘why not?’” says one portfolio manager at a large global macro firm. The cost of taking out puts on Japanese bonds is negligible. The upside huge.
It might, nevertheless, prove to be a long trade, and one peppered with uncertainties.