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Abe Doomsday Risk Prompts Moody’s Warning on JGBs: Japan Credit

By Finbarr Flynn and Monami Yui - Jan 30, 2014

 

Moody’s Investors Service says Japan’s biggest banks need to cut bond holdings and boost loans to protect their balance sheets from potential losses should Prime Minister Shinzo Abe’s stimulus spur yield surges.


Sumitomo Mitsui, Japan’s second-biggest bank by market value, cut Japanese government bond holdings by 56 percent, or 11.5 trillion yen, at its main lending unit in the nine months to December, as domestic loans rose 4.3 percent last year.

The BOJ, which has driven 10-year yields down to 0.62 percent, estimated in October that a one-percentage-point increase in JGB yields would cause the biggest banks to incur 2.9 trillion yen in unrealized capital losses.

“Banks need to rebalance their portfolios away from JGBs,” Graeme Knowd, a Tokyo-based associate managing director at Moody’s who overseas financial institutions, said in a phone interview. “If it turns out that Abenomics hasn’t worked and only ended up leaving Japan with a bigger pile of debt,” a “doomsday scenario for JGBs” isn’t “a zero probability scenario,” he said.

‘Encouraging Signs’

“It is certainly not our main scenario,” Knowd said. Moody’s said in its Global Macro Outlook in November that “there have been further encouraging signs that the more aggressive monetary stance adopted by the Bank of Japan is having a positive impact.”

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