Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Japan's banks have reinvented themselves: In just four years, they've found a whole new way to be miserable.

In the summer of 2012, Japan watchers were nervously drawing parallels with southern European banks' holdings of their governments' collapsing bonds. The anxiety wasn't baseless. Back then, the five "city" banks -- Mizuho, Mitsubishi UFJ, Sumitomo Mitsui, Resona and Saitama Resona -- owned the equivalent of $1.4 trillion in Japanese government bonds. Throw in other domestically licensed banks, and the figure rose to $2 trillion. A big spike in yield could doom the financial system.

Almost Sold Out
Japan's banks have dramatically reduced their holdings of Japanese government bonds
Source: Bank of Japan, Bloomberg

Nothing of the sort happened. The big lenders got rid of more than half of their JGB pile by selling it to the Bank of Japan, which couldn't buy enough of the bonds; the yield on the 10-year security went from 1 percent to minus 0.28 percent. Yet shareholders of these banks today are less sanguine about them than they are about their large European rivals. The new fear is threefold.

Peak Pessimism
Price-to-book values of country's biggest lenders trail troubled European rivals
Source: Bloomberg
*Market-cap-weighted ratios for three Japanese and 10 U.K., German, French and Swiss banks.

The first worry is about additional monetary easing. Macquarie analysts said in early July that a "deeper" slide in what the Bank of Japan pays the lenders on some excess reserves to minus 0.3 percent from the current minus 0.1 percent could reduce profit at Japan's top 10 banks by about 10 percent this fiscal year. Earnings are already fading: In May, Mitsubishi UFJ, Sumitomo Mitsui and Mizuho forecast net income will fall 5.2 percent to 2.15 trillion yen ($21.4 billion) in the year that started April 1, according to estimates compiled by Bloomberg.

The second concern is about internationalization. Four years ago, U.S. banks had 20 percent more cross-border exposure than Japanese banks. But with overseas claims of $4.1 trillion at the end of last year, Japanese banks are leading now. Lending in a home market blighted by corporate deleveraging and an aging, shrinking population "isn't very profitable," as Mizuho President Yasuhiro Sato noted in December. Not only have the lenders financed more assets abroad, they've also acquired them, especially in Southeast Asia, where they've been on a buying spree of banks. If Brexit-related concerns roil global credit markets, Japan's lenders could end up paying the price for their global ambitions.

Even so, immediate fears about Brexit are overdone. Japan's banks have modest exposure to Europe. MUFG, which garners 40 percent of its revenue from offshore operations, has said it has no plans to withdraw from Britain, which will “continue to be an important market.” In fact, Japan's biggest bank has just 4.3 percent of its credit exposure, or 4.8 trillion yen, in the U.K., according to Deutsche Bank.  Most of its offshore footprint is in Asia and the U.S., where it's bound to keep expanding as it looks for ways to beat slow growth at home. 

Mizuho, which formed an alliance with the U.K. research and trading house Redburn, remains a minnow in Europe, and is focusing more on headcount gains at its U.S. operations, the bank said in April. Sumitomo Mitsui Banking Corp, a unit of Japan's second-biggest lender, has said Brexit won't affect it significantly. 

Finally, a bigger apprehension than Brexit may be the Brexit-induced safe-haven surge in the yen.

Puppets On Yen's String
Japanese banks' share prices move in lockstep with home currency, but in opposite direction
Source: Barclays Capital, Bloomberg
*Market-capitalization weighted, yen-denominated; normalized to 100 for April 2016. **Barclays Capital index, normalized to 100 for April 2016.

The two-year JGB that yields negative 0.36 percent earns 1.4 percent if dollar funds are used to borrow yen. That's 80 basis points more than the yield on U.S. Treasuries of similar maturity. Their perverse attractiveness could pull more foreign money into Japan's negative-yielding notes, pushing their already elevated price even higher.

Japanese banks, which still hold a fair amount of the bonds, are sitting on a tightly wound spring that could uncoil any time. That would revive the worry Japan watchers had in 2012.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andy Mukherjee in Singapore at
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Paul Sillitoe at