Some Bonds Plunge by 50%, Japan's Largest Life Insurance Company Properly Allocates 70 Billion Yen for Impairment

The continued rise in Japanese government bond yields is pushing the largest life insurance company in Japan to an inevitable breaking point where it must acknowledge losses.

During the fiscal year ending March of this year, Nippon Life Insurance Co., Ltd. booked an impairment loss of 70 billion yen (approximately 440 million U.S. dollars) on its holdings of Japanese government bonds. A company spokesperson stated that this was the first write-down since the Bank of Japan began raising interest rates in March 2024, and the depreciation was triggered by market values of some bonds falling more than 50% below their purchase prices, with virtually no possibility of recovery.

This impairment is not an isolated incident. As of the end of March this year, the unrealized losses on domestic bonds (including government bonds) held by Japan's four major life insurance companies have expanded to 14 trillion yen, an increase of over 60% from a year earlier. The Japanese benchmark 10-year government bond yield has risen from around 0.7% when the Bank of Japan started raising rates to about 2.7%, imposing heavy unrealized losses on long-dated bonds purchased during the near-zero interest rate period.

Naoki Akai, Executive Vice President of Nippon Life, admitted that the company sold about 4 trillion yen in bonds in the last fiscal year and recorded a loss of 1 trillion yen, and is currently continuously replacing low-yield bonds with high-yield bonds. Shinji Takao, Managing Executive Officer of Sumitomo Life, sighed that the current speed of interest rate increases is "too rapid," with extremely high volatility, and the upper limit on interest rates remains unclear.

The driving force behind the selling of Japanese bonds comes from two directions. First, the global transmission of inflation, with energy price increases driven by war raising borrowing costs worldwide; second, domestic fiscal concerns, with Prime Minister Satsuki Takashi's aggressive fiscal policy prompting market skepticism about fiscal discipline. Nomura Securities strategists pointed out that the signals of "raising interest rates with one hand and borrowing with the other" are prompting a repricing of long-term interest rates. Since Takashi took office as the president of the Liberal Democratic Party in October last year, the yields on 10-year and 30-year government bonds have climbed by more than 10 percentage points respectively.

It is worth noting that in April, Japan's core CPI rose by just 1.4% year-on-year, the lowest in four years, but this cooling was mainly due to government subsidies, not a contraction in demand. The corporate goods price index rose by 4.9% year-on-year during the same period, and import prices increased by 17.5%, indicating that the pressure of imported inflation has not subsided. The Bank of Japan has raised its core inflation forecast for this fiscal year from 1.9% to 2.8%.

For the global market, Japan's situation is far more than a domestic issue. As the world's largest creditor nation and a "ballast stone" for long-term low interest rates, the significant fluctuations in Japanese bond yields are forcing funds to withdraw from global risk assets and return to Japan, exacerbating concerns about liquidity tightening and the sustainability of sovereign debt, becoming an indispensable systemic variable in the current global financial system.