Japan banks look to hedge funds, private equity to stoke returns

The Bank of Japan building in Tokyo. With the BOJ committed to holding down the benchmark bond yield at around zero per cent, Japanese banks are following the nation's largest insurance firms in considering more alternative assets as choices narrow.
The Bank of Japan building in Tokyo. With the BOJ committed to holding down the benchmark bond yield at around zero per cent, Japanese banks are following the nation's largest insurance firms in considering more alternative assets as choices narrow.PHOTO: REUTERS

TOKYO • Japan's regional banks are turning to private equity, hedge funds and real estate in search of higher returns as regulatory concerns restrict ownership of foreign bonds.

Alternative assets was the favoured choice of investment for five lenders, according to a Bloomberg survey of 11 regional banks conducted last month.

Three respondents picked foreign bonds, while none of the lenders found Japanese government debt attractive given depressed yields.

Japanese banks are following the nation's largest insurance companies in considering more alternative assets as choices narrow, with the Bank of Japan (BOJ) committed to holding down the benchmark bond yield at around zero per cent.

Overseas debt holdings have also come under scrutiny by the Financial Services Agency after investors suffered losses last year when Treasury yields surged, following the election victory of US President Donald Trump.

"It's like the banks' hands are tied with regulation while the BOJ is strangling their neck," said Mizuho Securities senior analyst Yasunobu Katsuki. "What's markedly different this fiscal year is there's virtually no market to eke out profits. That discourages risk taking for higher returns as there is little buffer to offset any losses."

Asset allocation will become more difficult, according to six of the 11 regional lenders which responded to the survey. Seven banks see unfavourable investment conditions for domestic bonds for the fiscal half starting Oct 1.

Japan's regional banks owned 28.7 trillion yen (S$352.2 billion) of Japanese government bonds (JGB) as of end-July, or about a third of the holdings by all lenders, down from 32 trillion yen at the end of January.

Chiba Bank, the No. 2 regional lender by market value, said in July that the "very difficult environment for investment" meant it would stay "immobile". That view was echoed by a respondent in the survey, which said a "sense of being in a stalemate is heightening as attractive assets are dwindling".

The 10-year Treasury yield slipped to near 2 per cent after peaking at around 2.63 per cent this year.

The Japanese benchmark bond fell below zero per cent this month, while the nation's Nikkei stock average is up just 2.5 per cent since Japan's fiscal year started in April.

Of the respondents, 10 banks expect the benchmark JGB yield to be between 0.05 per cent and 0.1 per cent by the end of the fiscal year.

"We are diversifying allocations to foreign debt or investment trusts as returns from yen bonds have diminished significantly under the Bank of Japan's negative-rate policy," Nanto Bank, the fourth-largest holder of foreign assets among the country's 64 regional lenders, said in its response to the survey. 

The banks were split on the outlook for foreign bonds. Four said the market is improving compared to their initial forecasts at the start of the fiscal year, while three of those surveyed said conditions have worsened. The remaining lenders said yields are tracking within projections.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 13, 2017, with the headline 'Japan banks look to hedge funds, private equity to stoke returns'. Print Edition | Subscribe