Selling spree of Japanese bonds leads to floating losses hitting the peak! Life insurance giant Nippon Life sets aside 70 billion Japanese yen for impairment.

Nippon Life Insurance has made provisions for impairment losses on its holdings of Japanese government bonds, indicating that the unrealized losses on some of its bond holdings have expanded to the level requiring write-downs. Data shows that in the fiscal year ending March 31, Japan's largest life insurance company made provisions for 70 billion (approximately $440 million) in impairment losses. A company spokesperson stated that this is the first time the company has made such write-downs since the Bank of Japan shifted to a tightening policy in March 2024. The market value of some of the bonds held by the company has fallen by over 50% from the purchase price, indicating little chance of recovery, thus triggering impairment standards. Amid concerns over inflation, interest rate hikes, and worries about the Japanese government expanding fiscal spending to support the economy leading to a selling spree of Japanese government bonds, Nippon Life Insurance is not the only institution facing the highest bond yield shock in decades. As of the end of March, the unrealized losses on domestic bonds, including government bonds, held by Japan's four major life insurance companies had expanded to 14 trillion, an increase of over 60% from a year earlier. Nobuji Takao, Executive Director of Sumitomo Life Insurance Co., stated, "The speed of the current rate hike is too rapid." He acknowledged that the currently high yields are attractive for investments but also mentioned, "Volatility is high, and it is still unclear how much rates will rise." The benchmark 10-year Japanese government bond yield has risen from around 0.7% when the Bank of Japan began hiking rates to around 2.7%. The rise in yields has led to greater unrealized losses on bonds purchased during the near-zero rate period. Life insurance companies typically purchase government bonds and other securities and hold them until maturity to match their long-term liabilities. However, if policy cancellations increase, and companies are burdened with a large amount of unrealized losses, they may be forced to sell holdings for cash, adversely affecting their profitability. Naoki Akahori, Executive Vice President of Nippon Life Insurance, stated, "Due to our long-term liabilities, we hold a significant amount of Japanese government bonds. When interest rates rise, the unrealized losses increase." The insurance company sold around 4 trillion in bonds last fiscal year, resulting in 1 trillion in losses. He added, "With rates rising further recently, we believe more actions need to be taken." He pointed out that the company is selling low-yield bonds and buying higher yield bonds. There are concerns in the market that significant unrealized losses may limit the investment choices of these institutions. Sources reported earlier this year that the Japan Financial Services Agency conducted interviews with major life insurance companies about asset management operations in January. Regulatory authorities are closely monitoring the impact of the sharp rise in interest rates and conducting related discussions simultaneously. However, Yasushi Ueda, CFO of Meiji Yasuda Life Insurance Co., stated that although unrealized losses on bonds are expanding, the company still has around 48.8 trillion in book profits on securities investments, including stocks. Benefiting from the prosperity of the Japanese stock market, the insurance company has made substantial profits from its stock holdings. He said, "We do not see any major problems at the moment." Inflation pressure and fiscal worries peak! Japanese bonds are being sold off Japanese government bonds have recently been sold off, reflecting two mutually reinforcing pressure points. Firstly, there is global inflation transmissionwar-driven increases in energy prices are pushing up borrowing costs for governments worldwide, and Japan cannot remain immune. The second is domestic fiscal concerns. Japanese Prime Minister Yasunao Takayoshi called for the introduction of a supplementary budget this month to cope with rising commodity prices, sparking concerns in the market about Japan's fiscal discipline. Analysts point out that concerns about the expansion of Japan's government fiscal deficit have pushed up the "fiscal risk premium," becoming a significant driver of the rise in Japanese government bond yields. Since Takayoshi assumed the leadership of the Liberal Democratic Party in October 2025, his proactive fiscal policies have caused the yields on 10-year and 30-year government bonds to rise cumulatively by more than 1 percentage point. The Organisation for Economic Co-operation and Development (OECD) previously reported that by 2024, Japan's total public debt had reached about 206% of GDP, the highest level among OECD members. Japanese Ministry of Finance data shows that the ratio of Japan's government total debt to GDP has reached nearly 250%. The report warned that Japan should rely more on measures such as increasing consumption tax to improve its fiscal situation, rather than further expanding fiscal expenditures. However, the Takayoshi government has chosen the opposite path. Shinji Michitoba, a rate strategist at Nomura Securities, pointed out, "For a country with a high debt-to-GDP ratio like Japan, gradually tightening monetary policy while expanding fiscal spending sends a signal to the market of 'raising interest rates with one hand and borrowing with the other," leading to a repricing of long-term Japanese government bond rates." At the same time, the slow pace at which the Bank of Japan is raising interest rates could lead to sustained high inflation for a longer period. Fiscal stimuli and the potential political pressure to require the Bank of Japan to gradually tighten policy have exacerbated investors' concernsthat even as price pressures rise, Japan is trying to maintain economic demand at high levels. Eiji Doke, Chief Bond Strategist at SBI Securities in Tokyo, stated, "The Takayoshi government is pursuing a high-pressure economic policy, therefore, hoping that the Bank of Japan will remain cautious on raising rates." "The stronger the inflation pressure and the higher the inflation expectations, the more likely Japan will lag behind in policy." Indeed, even before the outbreak of the conflict in the Middle East, inflation expectations in the Japanese bond market had been steadily rising, indicating that price pressures may be structural rather than cyclical. The Bank of Japan last month raised its core inflation rate forecast, excluding fresh food, for the fiscal year 2026 (April 2026 to March 2027) from 1.9% forecasted in January to 2.8%. However, data released last Friday showed that in April, Japan's national core CPI (excluding fresh food) rose by 1.4% year-on-year, lower than the expected 1.7%, and significantly lower than March's 1.8%, hitting a four-year low since March 2022; the overall CPI was also 1.4%, below the expected 1.6%. This marks the fourth consecutive month that Japan's inflation rate has been below the Bank of Japan's 2% policy target. On the surface, the April inflation data can be seen as "comprehensive cooling"the overall CPI dropping to 1.4%, the core CPI dropping to 1.4%, and the "core-core CPI" (excluding fresh food and energy prices) rising by 1.9%, lower than March's 2.4%, hitting a 14-month low. However, behind the structural details of the data, inflationary pressure has far from dissipated. Firstly, the decline in inflation is not due to reduced demand but rather the result of strong policy intervention. Government subsidies for tuition fees and other one-time expenses at private high schools have suppressed prices, while energy subsidies have continued to buffer the transmission of international oil prices to end consumers. Once the subsidies are removed, suppressed prices will rebound at a faster pace. Secondly, the Corporate Goods Price Index (CGPI), an indicator of consumer prices, soared by 4.9% year-on-year in April, hitting a three-year high, while import prices rose by 17.5%, with energy prices and a weak yen collectively driving up input inflation. Junko Koeda, a member of the Bank of Japan's Policy Board, pointed out that "companies are raising prices to pass on costs more quickly than in the past," a view completely consistent with the statement made earlier by the Bank of Japan Governor Kazuo Ueda. Finally, a more hidden structural factor comes from the AI industry. On May 21, Junko Onoda, a member of the Bank of Japan's Policy Board, warned during a speech to business leaders in Fukuoka that robust AI demand may be driving up energy prices, indicating that "the prices of many goods could rise across the board in the future." As a core participant in the global AI supply chain, Japan has benefited from the boom in semiconductor exports driven by AI (chip exports surged 44% year-on-year in April) and has been burdened by the incremental demand for electricity from AI data centers. These increased demands, combined with disruptions in Middle Eastern energy supplies, are creating unprecedented complexity for Japan, an economy heavily reliant on energy imports. Moreover, the turmoil in the Middle East has had a significant impact on Japan, with a sharp 64% year-on-year decline in April crude oil imports, resulting in a reduction in total energy imports that has, paradoxically, lowered overall inflation readings at the data level. In other words, part of the "credit" for the lower April CPI comes from physical supply-side contractions, rather than a cooling of demand-sidethis contradiction itself foreshadows the potential for a rebound in inflation in the future. In the short term, Japanese government bonds may continue to be under pressure. As the world's largest creditor nation and a long-time provider of low-interest rate "ballast," Japan's sharp fluctuations in yields are triggering global capital flows and cost reassessments, becoming a decisive factor in global risk. In the past, Japan's long-term ultra-low interest rates made its domestic funds a stable buyer of US and European bonds and risky assets; at the same time, arbitrage transactions borrowing cheap yen to invest in high-yield offshore assets were an important source of global liquidity. Now, rising Japanese bond yields coupled with rate hike expectations are forcing funds to withdraw from global stock and bond markets and flow back to Japan, potentially leading to localized liquidity tightening and asset price volatility, exacerbating general concerns about the sustainability of sovereign debt and causing resonance sell-offs in the bond market.