How Japan’s Bond Selloff Impacts Banks and Insurers

After starting the year strong, stock prices in Japan’s financial services sector faltered slightly amid volatility in Japanese Government Bonds. While concerns over bond prices have pressured insurers, we view the associated risks as manageable.

Japanese Prime Minister Sanae Takaichi’s plans to boost spending and cut taxes first spooked bond markets on Jan. 20, fueling worries that Japan’s government debt will expand. The 10-year JGB yield jumped 26 basis points to 2.33% through Jan. 20 and stood at 2.23% midday Feb. 3, hovering near its highest level since 1998.

The effects on insurance companies look limited, as solvency concerns will likely be offset by higher investment returns in the long term. Life insurers are more exposed than property and casualty insurance providers. Japan’s second-largest publicly traded life insurance company Daiichi Life DLICY looks the most exposed.

And for Japan’s largest banks, unrealized equity gains should offset the potential bond losses.

Life Insurers Are More Sensitive to Volatile Interest Rates

As a result of over-hedging (longer asset duration than liabilities duration), Japanese life insurers have higher environmental and social risk sensitivity to interest rates than non-life insurers.

According to sensitivity analysis, Daiichi Life’s economic solvency ratio (ESR) will see a 7 percentage-point drop on a 50 basis-point decline in domestic interest rates, much larger than the 1.0-point and 0.2-point drops for property and casualty insurance companies Sompo 8630 and Tokio Marine TKOMY, respectively. Property and casualty insurance company MS&AD MSADY did not disclose its sensitivity.

We think the thin liquidity in ultra-long bond transactions and a market increasingly dominated by short-term traders have resulted in high volatility in 30-year bond yields and risk to life insurers’ economic solvency ratios. According to data released by the Japan Securities Dealers Association, foreign investors account for approximately 65% of the monthly cash trading volume in the JGB market, compared with just 12% in 2009.

Despite Daiichi Life’s higher sensitivity, we think the risk is manageable. Higher interest rates also result in potentially higher lapse rates for savings-type products, but can also benefit the sales of yen-denominated products. Any negative impact on Daiichi Life should be offset by higher share prices, capital gains from stock sales in the short term, and higher investment returns in the longer term.

Equity Gains Cushion Banks from JGB Volatility

The short-term risk to banks’ earnings is mainly from potential realized losses on selling JGBs. However, for the five Japanese banks we cover, the loss is well offset by potential gains on equity sales.

Regional bank Resona RSHGY saw an unrealized loss of JGBs classified as available-for-sale in its September-quarter accounts of almost JPY 100 billion. This represents a high 41% of our March 2026 net profit forecast of JPY 243 billion. However, the bank’s unrealized equity gain was JPY 692 billion. A net gain therefore remains likely for its security sales over the next five years.

For Japan’s megabanks, Mitsubishi UFJ MUFG, Mizuho MFG, and Sumitomo Mitsui Financial Group SMFG, the unrealized loss in their September accounts is small, at less than 9% of our profit forecast. Sumitomo Mitsui’s unrealized JGB loss is 23% of our profit forecast, but similarly to Resona, unrealized equity gains well offset the potential bond losses.