Almost 6 months ago, I asked this question: “HOW LONG WILL THE BOJ BE ABLE TO AVOID THE COLLAPSE OF A MAJOR FINANCIAL INSTITUTION?” Surely, the central bank of Japan has done a remarkable job so far in keeping big insolvent Japanese financial institutions afloat. However, the constant flow of money printing necessary to achieve this feat, the current Japanese government pledging a ton of helicopter money (that it doesn’t have) to revitalize the economy, and a mountain of unsolved economic and financial problems from the past are all now piling up on top of each other. The result? Japanese JGB yields broke loose and are now running wild.
Wonder who the major holders of JGBs in the world are? Here is the answer:
- ~50% held by the Bank of Japan
- ~17.5% held by Japanese insurance companies
- ~15% held by Japanese banks
- ~8% held by foreign investors
Wonder how underwater those financial institutions are, starting from the BOJ, holding JGBs in their books? A good proxy is the iShares Core Japan Government Bonds ETF (ticker: 2561), even if it was only listed in 2021.
According to the latest official data, back in September 2025, the total notional amount of Japan Government Bonds outstanding was JPY 1,088.2 trillion, roughly USD 7 trillion. If we use the 2561 ETF as a proxy to mark to market those JGBs, the total paper loss on JGBs holdings is roughly USD 1.9 trillion. Yes, my dear reader, ONE POINT NINE TRILLION UNITED STATES DOLLARS.
There is one important detail I need to highlight before moving forward: the 2561 ETF tracks the performance of the FTSE Japanese Government Bond Index, which measures the performance of fixed-rate, local-currency Japanese government bonds accessible to institutional investors. The index is market capitalization-weighted and has a minimum time to maturity of at least one year. Why is this detail important? Because the BOJ, local insurances, and banks don’t hold the same type of JGBs portfolio. The BOJ and banks tend to hold a similar type of portfolio that tracks the duration of the total amount of JGBs outstanding; on the other hand, insurance companies tend to hold long and ultra-long duration portfolios. This means that the total losses aren’t evenly distributed, but are significantly larger for insurance companies.
Now, based on recent estimates, the total amount of capital held by Japanese life insurance companies overall is between JPY 20 trillion and 25 trillion (USD 135 billion to 170 billion). Since non-life insurance companies don’t hold a significant amount of long-dated JGBs, let’s assume 17.5% of all the JGBs are held by life insurance companies and that the duration of that portfolio is 7 years (which we know is wrong, but let’s help them out a bit). Consequently, the total amount of losses in the system is equivalent to USD 332 billion on their JGBs alone. Yes, my dear reader, the whole Japanese life insurance system is theoretically insolvent. What about banks? Based on recent estimates, the total amount of capital held by Japanese banks overall is between JPY 30 trillion and 35 trillion (around USD 200 billion to 240 billion). The total amount of JGBs paper losses that all these banks are sitting on? Roughly USD 285 billion. Yes, my dear reader, the Japanese banking system as a whole is theoretically insolvent too. I am sure someone now would feel itchy to point out that, for sure, banks used hedging to cover their risk. However, those familiar with how hedging works will quickly reply that hedging with derivatives is a transfer of risks within the system; it does not eliminate them. Consequently, as a whole, the Japanese life insurance and banking systems remain theoretically insolvent. Furthermore, we are not even considering the mark-to-market losses rising yields are creating in all other assets they hold, like loans or foreign investments. What’s even more ridiculous is that the BOJ, a.k.a. their lender of last resort, is sitting on USD 800 billion of paper losses on its JGBs holdings.
In the post-GFC world, no one cares about paper losses on government bonds anymore since regulators like to assume that banks can hold those assets till maturity, and high-rated governments like Japan will never default. Hence, those losses will be dealt with over time. If this assumption were correct, then why, back in 2023, did the FED rush to set up the BTFP facility to bail out US banks that were falling like dominoes after Silicon Valley Bank and First Republic Bank defaults? Because when banks need liquidity to finance their operations, they borrow in the repo market against collateral, and that collateral, including government bonds, isn’t accepted at nominal value but at market value. Consequently, the deeper the losses on high-quality assets in a bank’s books, the lower the amount of liquidity banks can borrow to finance their daily operations and cash imbalances. Yes, as you can intuitively understand, higher and higher yields on government bonds lead to a liquidity crisis in the banking system. However, as I said many times, banks can remain insolvent for a very long time as long as they have liquidity to meet claims. Credit Suisse is the perfect example since it took over two years to default after the massive hole Archegos created in its books in 2021, on top of losses on assets generated by rising yields at a speed nobody at the time, except myself and a few others, expected, since central banks successfully brainwashed people to believe that after COVID, rates would have remained very low for a very long time since for many years they didn’t have to deal with that terrible beast called inflation.
Not surprisingly, at this point, to justify why the BOJ continues printing JPY non-stop. Even if nominally its QE programme slowed down, the BOJ never had in the back of its mind to be serious about tightening financial conditions since they are fully aware the whole Japanese local financial system will then implode in the blink of an eye under a brutal liquidity crisis. This comes on top of a ballooning government debt that never slowed down, compounding the problems, yet still many people don’t understand why the JPY currency isn’t strengthening even if JGB yields are skyrocketing, as I explained a long time ago in: “A PEEK INTO THE FUTURE: USD/JPY ROAD TO 300.”
If anything, the JPY is too strong right now compared to fundamentals, and the only reason why it does not weaken at a faster pace is the Japanese government’s constant threat to intervene in the FX market using its “war chest” of roughly USD 1.5 trillion of US Treasury bonds (“Japan escalates forex intervention threat as yen nears 160 per dollar“). War chest that, unfortunately for them, is being eroded in value due to the out-of-control inflation in the US, even if it is government policy to deny it and fake the numbers to a level that hides the true reality people are living. Investors aren’t stupid, though; this is why long-term US Treasury yields aren’t coming down as everyone, except myself and a few others, again expected (“IF THE FED CUTS RATES, THE DAMAGES WILL BE FAR GREATER THAN THE BENEFITS“).
Despite the Nikkei reaching an all-time high beyond 53,000, nobody in Japan is popping champagne bottles to celebrate that. The reason? Very few households in Japan hold stocks, while the vast majority sit on large cash savings. Cash savings in JPY that are being eroded at a blistering pace by the out-of-control monetary inflation created by the BOJ. So, yes, the population is being forced to bail out its own financial system, and I fear very few are aware of what’s happening. Perhaps when the government won’t be able to keep the JPY from collapsing in value anymore, similar to what happened to other countries in the past, like Argentina, Venezuela, or most recently Turkey, they will finally realise how they have been royally screwed. Sadly, it will be too late to deal with it at that time, and Japan, a country with very few natural resources, might sadly fall into economic oblivion.
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