Recently, it was reported that the Bank of Japan’s Central Finance and Credit Center plans to sell US Treasury bonds and European bonds worth up to 10 trillion yen (about 630 billion US dollars), which could result in a comprehensive net loss of about 1.5 trillion yen by the end of the fiscal year ending in March 2025.
The Central Finance and Credit Center is the central organization of agricultural cooperatives, and is currently negotiating the plan with agricultural cooperatives across the country to raise about 1.2 trillion yen in new capital to ensure its financial health.
As of the end of March, the Central Finance and Credit Center managed about 56 trillion yen in financial market assets, with foreign bonds accounting for 42%. The potential total losses in bond investments, including foreign bonds, amount to about 2.2 trillion yen.
Arthur Hayes pointed out that the Central Finance and Credit Center is the first bank to surrender and announce the need to sell bonds, and he expects that other Japanese banks will engage in similar activities. According to a survey by the International Monetary Fund (IMF), by 2022, Japanese commercial banks hold about 850 billion US dollars in foreign bonds, including nearly 450 billion US dollars in US Treasury bonds and about 75 billion US dollars in French bonds.
Hayes also explained why Japanese banks chose to sell US bonds and recognize losses at this time. This is because Japanese banks do not use yen to purchase foreign bonds. Their operation is to sell yen and buy US dollars for foreign exchange hedging, using the liquidity of a 3-month forward foreign exchange rollover for hedging.
Hayes believes that the Bank of Japan will act first and recommends that Japanese banks should not sell US bonds in the open market, but should transfer these bonds directly to the balance sheet of the Bank of Japan to avoid market impact.
Then, the Bank of Japan will hold these US bonds to maturity through the Foreign and International Monetary Authorities Repo Facility (FIMA) in the US.
FIMA, launched by the Federal Reserve in March 2020, supports global financial market liquidity and mitigates the impact of the pandemic on the global economy. This agreement allows foreign central banks and international organizations to use their holdings of US Treasury bonds as collateral to apply for US dollar liquidity from the Federal Reserve.
Hayes stated that this is why he is accelerating the conversion of pledged US dollars (sUSDe) from Ethena to crypto risk assets. He also mentioned increasing positions in Pendle and Doge.