Norinchukin Bank, the Japanese farmers’ lender with most of its money invested overseas, says it sees little choice but to put additional funds into foreign assets this year even as U.S. debt markets become more volatile.
The bank, which had 64.2 trillion yen ($523 billion) of securities at the end of March, more than doubled net income to a record 411.3 billion yen last fiscal year. A 14 percent drop in the yen versus the greenback boosted interest income from overseas holdings, almost all of which are in bonds or other credit investments, said Shinichi Saitoh, a senior managing director at Norinchukin.
“We have no choice but to look for dollar or euro” investments when Japanese government bonds mature or there are new deposit inflows, Saitoh said in an interview at the bank’s headquarters in Tokyo last week. “Funds that we have to keep in yen, we will keep with the Bank of Japan.”
The cooperative lender, which serves as the central financial institution for Japanese farmers and fisherman, has rebounded from a 572.1 billion yen loss in 2009 when it asked group members for a 1.9 trillion yen capital injection. A gauge of Treasury volatility has climbed to 84.74 from 59.45 over the past 12 months, the Bank of America Merrill Lynch MOVE Index shows, as the Federal Reserve prepares to raise interest rates and stricter bank regulations curb trading liquidity.
Norinchukin is investing in very short-term Treasuries, according to Saitoh, who said uncertainty about the direction of the U.S. economy and increased market volatility are both the biggest risk and investment opportunity for the bank. Sixty nine percent of the bank’s securities were in dollars and euros at the end of March.
“Is the U.S. economy really recovering or is it still in the middle of a long period of stagnation?” he said. “Depending on which of those two views holds sway, there’s a huge impact on interest rates.”
Japan’s benchmark 10-year sovereign bond yields have climbed 23 basis points to 0.425 percent since dropping to a record low of 0.195 percent in January. Similar-maturity U.S. Treasury yields have risen 46 basis points to 2.29 percent during the period.
In the year ended March, valuation gains on overseas bonds more than tripled to 982.9 billion yen, while paper profits on Japanese government debt rose 17 percent to 334.5 billion yen, according to a statement from the lender.
Japanese banks can keep funds with the BOJ as excess reserves that pay an interest rate of 0.1 percent. Norinchukin’s equity capital buffer stood at 17.2 percent in March, one of the highest in the world, compared with 11.1 percent for Mitsubishi UFJ Financial Group Inc., the nation’s biggest banking group.
Moody’s Investors Service rates Norinchukin A1, its fifth-highest investment grade. The bank’s underlying credit rating is three levels lower at Baa1, and is supported because of the “very high likelihood” the Japanese government would support it in times of stress.
“The bank’s regulatory and economic capital is sensitive to changes in the global market environment,” Moody’s said in a report June 3. “An abrupt shift or sustained deterioration of market conditions could negatively impact Norinchukin’s profitability and net unrealized gains.”
Norinchukin lends money to farmers, fishermen and foresters and makes investments on their behalf to provide them with returns that supplement their incomes. The bank seeks to achieve “high returns in the medium to long term” through diversifying its investments globally, according to its website.
“Market conditions are still basically favorable under quantitative easing,” Saitoh said. “But the risks are increasing.”