(Bloomberg) -- Norinchukin, Japan’s premier agricultural bank and one of the nation’s largest institutional investors, plans to raise 1.2 trillion yen ($7.7 billion) of capital and reshuffle its overseas investment portfolio after losses on its bond holdings swelled. 

The bank’s paper losses rose to 2.2 trillion yen as of the end of March 2024 compared with 1.7 trillion yen a year earlier, it said in a statement. The company expects a loss of at least 500 billion yen this fiscal year. 

Norinchukin has become one of Japan’s biggest victims of the surge in interest rates in the wake of the US Federal Reserve’s aggressive monetary tightening launched in March 2022. This echoes the bank’s plight in 2009 when it racked up billions in losses from investments in overseas securitized products. 

“Given our experience in past cycles with rising interest rates, we thought we could keep holding bonds even with paper losses,” Chief Executive Kazuto Oku said at a press briefing in Tokyo. “But the increase and duration of the high rates went beyond our expectations.” 

Norinchukin plans to rejig its portfolio in the wake of this fallout. It aims to sell off US and European sovereign bonds. With yields rising in Japan, domestic government bonds are now an investment option, according to Chief Financial Officer Taro Kitabayashi. Norinchukin will also look for other opportunities in bonds, credit and equity, he said.

The bank’s losses did not involve its holdings of collateralized loan obligations, according to Kitabayashi. The company held 7.4 trillion yen worth of the securities as of the end of March. 

Norinchukin has started talks with its members about raising capital but the response from some of them has been harsh, according to CEO Oku, who plans to take a pay cut. It expects to return to profit next fiscal year. The bank’s finances are sound even with the unrealized losses, the CFO said. 

The bank’s troubles stem from the years of ultra-low interest rates in Japan. To eke out extra yields, it followed a strategy similar to other Japanese banks and insurers and invested in Treasuries and other foreign bonds.

That strategy backfired when interest rates shot up, catching out Norinchukin like Silicon Valley Bank and other US lenders that faced losses on their bond holdings last year. For the Japanese bank, a sharp rise in foreign currency funding costs wiped out returns from bonds bought when their yields were lower.

The bank needs to reconsider its reliance on its securities portfolio and generate revenue from increasing project financing overseas as well as getting more fees from asset management, the CEO said. 


(Updates with CEO’s comments in fourth paragraph)

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