Losses mount for Japanese banks as foreign bonds weaken

Lenders are running out of options to combat the ultra-low interest rate environment.

Bloomberg reports that Japanese banks have lost another major earnings driver as foreign government bonds weaken in the face of heightening political turmoil devastating the European bond market. 

Pressured by ultra-low interest rates engineered by the central bank, the country’s lenders have been scrambling to boost profit margins by flocking to foreign bonds in a bid to bolster weak returns. However, the surge in Treasury yields in pressuring banks to either sell down their holdings or incur higher valuation losses.

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Mizuho Financial Group Inc. had the biggest valuation loss on its foreign bonds of the three lenders in the fiscal year ended March after posting a loss of about $460m ($50b yen) on foriegn bonds last quarter. 

Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group Inc were not exempt from the decline as the paper losses were the steepest for all three banks in at least four years.

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“If you ask where funds can go in this environment, the U.S. is difficult, you can’t say Europe is without unease and Japanese government bonds are negative out to five years,” said Ryoji Yoshizawa, an analyst at S&P Global Ratings in Tokyo. “There’s nowhere to go.”

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