(Bloomberg) -- Japan’s premier agricultural bank, Norinchukin, plans a complete overhaul of its investment strategy after massive losses on its overseas portfolio.

Unlike Mitsubishi UFJ Financial Group Inc. and other big listed banks, Norinchukin relies primarily on its securities portfolio worth about 60 trillion yen ($384 billion) to generate profit. Its lending business is far smaller than rivals and it doesn’t have investment banking operations. Yet the pressure to make money is no less urgent than for peers, since Norinchukin has to keep generating returns for the farming cooperatives that own it. 

For years, that imperative has pushed Norinchukin to invest overseas to escape Japan’s environment of negative interest rates. The firm poured funds into US government bonds, only to be saddled with losses after the Federal Reserve raised interest rates. Norinchukin had not counted on borrowing costs to remain elevated for this long. 

“We will review the entire portfolio strategy,” Chief Financial Officer Taro Kitabayashi said on Wednesday as the bank released financial results. Paper losses rose to 2.2 trillion yen as of the end of March 2024, compared with 1.7 trillion yen a year earlier. Norinchukin expects a loss of at least 500 billion yen this fiscal year.

Given its ownership structure, there are limits on the bank’s investment options. In addition to bonds, it is a major investor in collateralized loan obligations, with 7.4 trillion yen worth of the securities as of the end of March. 

“Norinchukin is a deposit-taking financial institution, so it is not appropriate for it to take large-scale equity investments,” said Hironari Nozaki, a professor at Toyo University. 

Still, the bank has to reconsider its dependence on its securities portfolio, Chief Executive Officer Kazuto Oku said. It will try to generate revenue from increasing project financing overseas as well as getting more fees from asset management.

Norinchukin had to take interest rate risks like buying US Treasuries since investment in equity would be too costly for its regulatory capital, according to an official at the Financial Services Agency, who asked not to be named discussing a specific bank. Regulators have long been prodding Norinchukin to diversify its portfolio and the bank responded by starting to invest in other assets such as private equity, he said. 

With the end of negative rates in Japan and the prospect of the Bank of Japan cutting back on bond-buying, yields on the nation’s sovereign bonds have begun to rise. The yield on the benchmark 10-year JGB has reached 1% and yields on 20-year and 30-year debt have recently climbed to the highest in decades. That has made investing in JGBs an option again, Kitabayashi said. 

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To deal with the losses, the bank is turning to its members to raise 1.2 trillion yen of capital. The initial response from some of its members has been harsh, according to CEO Oku, who himself grew up on a farm.  

In 2009, the bank was forced to raise 1.9 trillion yen from cooperatives and other members after racking up Asia’s biggest realized and unrealized losses on investments in asset-backed securities. The fresh request has prompted some of them to question the bank’s investment strategy. 

“As long as the way they operate remains unchanged, the chance of this happening again is not zero,” said Shigeo Yamada, a member of one of the agricultural cooperatives that own the bank. “They should probably change.”

--With assistance from Mia Glass and Takako Taniguchi.

(Updates with more context and details from first paragraph.)

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