Japan has a problem that may be about to have a trickle effect into economies in Europe and North America. This problem is originating from one of its most prestigious banks, Norinchukin Bank. It lies in the amount of corporate debt they own estimated at $75 billion, and much of it in the bond market with collateralized loan obligations being the key vehicle. Many of these bonds are based in European countries with some in North America as well. But as they already are the world’s leading creditor and are only deepening their influence in the international corporate lending markets, these continued buyouts could spell trouble for the global economy.
What is driving Norinchukin Bank and other Japanese banks and investment firms to do this? Japan has battled economic deflation over the years, and the story has been no different so far in 2019. There’s been a mentality among Japanese consumers to become hoarders rather than spenders, but even more so there aren’t too many businesses looking to borrow at the moment. Because of this low economic activity, interest rates have even gone negative with Norinchukin Bank’s rates sitting at -0.1%. Unfortunately, Japan sees its answer to this problem in buying up riskier bonds internationally, though even in this their strategy appears to be very flawed.
As opposed to buying up bonds with long-term maturity dates and ones that have been rated with the best risk analysis; the bonds are based in short-term currency hedges. The issue with these bonds is that their short-term interest rates are low even though the long yield is still relatively high. What’s taking place in bringing in higher yield with these short-term currency hedges is something a little similar to when the US Treasury Bond index shows an inverted yield curve when short-term bonds outperform long-term bonds. If economic activity in Japan and the yield of these high-risk international corporate bonds doesn’t improve, a major correction to economies across Europe and North America could be felt.