Japan's banks are selling bonds for the first time this year

Japan's banks are selling bonds for the first time this year, prices are falling.

Lenders cut public debt holdings 142.2 billion Japanese yen ($ 1,700,000,000,000) of 31 October from a record 143.2 trillion yen a month earlier, the Bank of Japan data show. Added bonuses in each of the last nine months, as outstanding loans fell 2.1 percent to 391.9 trillion yen, the lowest since May 2008. Government bonds lost 1.5 percent since Sept. 30, set for worst quarter in seven years, the indexes compiled by Merrill Lynch Bank of America shows.

"Banks can make some changes in their strategies as the decrease in bond prices cut operating profits," said Yoshinobu Yamamoto, a Tokyo-based analyst at Deutsche Bank AG. Loans extended its biggest drop since 2005 as "the weak economic outlook, companies are building reserves and preventing capital spending and manufacturing is hollowing and move abroad," he said.

The double whammy means earnings at major Japanese banks, Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. will be reduced at least 4.3 percent, while earnings will increase in EE. UU. rivals such as JPMorgan Chase & Co. and Citigroup Inc. Japanese government bonds being made worse this year than all European countries, but dragged down by the sovereign debt crisis among developed nations.

Shinya Matsumoto, a spokesman for Mitsubishi UFJ, said the bank regularly monitors all risky assets, declining to give details of transactions. Kyosuke Hattori, a spokeswoman for the banking unit of Sumitomo Mitsui, declined to comment, as Masako Shiono, a spokeswoman for Mizuho. Companies based in Tokyo.

Bond sales

The largest banks in the second largest economy in the world sold a net ¥ 3000000000000 Japanese government bond in November, excluding short-term securities, the Securities Dealers Association of Japan reported on its website.

Investors in Japanese government bonds gained 3.3 percent in the first nine months of 2010, according to Merrill indexes. The securities have already compared this year's gain to 1.8 percent from December 20, just ahead of Ireland, Portugal, Spain and Italy among the 20 developed countries followed by the indices. U.S. Treasury Bonds returned 5.6 percent. Denmark's debt rose 8.4 percent to provide the most benefit.

The decrease in loans

"The banks may have sold more debt in November as part of a strategy to ensure decent profits from sales of bonds and loans to deal with weak demand," said Takehito Yamanaka, a Tokyo-based analyst at MF Global FXA Securities Ltd. "Some may have begun to offer loans to companies with lending margins narrow to capture the largest cake in a declining market."

The yield on the 10-year bonds in Japan rose 22 basis points this quarter, the biggest increase since the second quarter of 2008. ten-year yields, which fell 1 basis point to 1.15 percent as of 11:45 am in Tokyo, will go to 1.25 percent in late 2011
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Increased yields of Japanese government bonds and U.S. Treasuries can have an impact on bank earnings in the second half of the year ended March 31 Masayuki Oku, head of the Japanese Bankers Association, told reporters in Tokyo yesterday. Oku, who is also president of Sumitomo Mitsui, said the performance is unlikely that the "drastic change."

Bank lending fell for the 12th month of November, extending the longest losing streak since 2005, central bank figures show. Corporate loan demand has fallen for six quarters as companies compare investment, according to a Bank of Japan survey of loan officers.

Spending cuts

Loans outstanding at 83 lenders in the Topix Banks Index fell 2.5 percent to 5.44 trillion yen on average in the year to 30 September. Capital spending for 1664 companies in the Topix index declined in the last three months of 2010.

Debt declined even after the Bank of Japan lowered interest rates to zero and started three programs of credit totaling about 40 trillion yen to support the economy. Gross domestic product is likely to shrink this quarter for the first time in over a year due to the strong yen and deflation, according to a survey of 42 economists released December 8 by the government-affiliated Economic Planning Association.

"The biggest challenge facing Japanese lenders is how to improve their profitability," said central bank deputy governor Hirohide Yamaguchi at a forum in Tokyo on 10 December.

Smaller gains

Profit at Mitsubishi UFJ, the country's largest bank, was reduced by 4.3 percent to 509 billion yen in the year from April 1 of a projected 532 billion yen this fiscal year. Sumitomo Mitsui's net income fall 24 percent to 410 billion yen and Mizuho will slide 26 percent to 368 billion yen, estimates showed.

two Mitsubishi UFJ's main banking unit reported an average loan margin of 1.43 percent in the quarter ended September 30, the lowest since March 2007. Interest rates on deposits stood at 0.13 percent, also the lowest since March 2007.

The cost of protecting bank debt in the event of default is rising in this quarter, even as prices fall on average for the contracts that the rest of the investment-grade borrowers in the nation.

credit default swaps covering Mitsubishi UFJ subordinated bonds for five years rose to 103 basis points yesterday, most of the nearly five months, from 97 to 30 September, CMA prices show. The subordinated debt swaps Mizuho Corporate Bank Ltd., a unit of Mizuho, rose to 120 from 113.

Wall Street profits

The Markit iTraxx Japan index of credit-default swaps on 50 investment grade borrowers dropped four basis points this quarter to 102. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fails to meet its obligations.

the biggest Wall Street banks are about to make their second highest earnings ever this year. JPMorgan earnings rise 15 percent to $ 19 billion in 2011 and earnings of Citigroup is expected to gain 26 percent to $ 14.6 billion, according to polls.

Credit Suisse Group AG analyst Shinichi Ina Mizuho and Mitsubishi UFJ downgraded to "neutral" on 29 November, citing the deterioration of bond trading profits. Ina Tokyo-based Sumitomo Mitsui maintains "outperform", estimating a return on capital greater than their next fiscal year.

Mitsubishi UFJ, Mizuho and Sumitomo Mitsui all raised their earnings forecasts for the year in November, as trading gains and reduce cost of loans in the first half offset reduced net interest income.

Banks Underperform

Topix banks index has fallen 2 percent this year compared with an increase of 0.1 percent in the benchmark Topix. Mitsubishi UFJ rose 1.4 percent at 11 am Break in Tokyo, compared the loss this year to 1.8 percent. Mizuho gained 2.7 percent, trimming its decline in 2010 to 6.6 percent. Sumitomo Mitsui added 1 percent, extending its gain to 11 percent.

In the U.S., the KBW Bank Index rose 20 percent this year, outpacing an increase of 13 percent for Standard & Poor's 500. Citigroup is up 43 percent, while JPMorgan fell 1.6 percent.

The Bank of Japan, which held yesterday in interest rates between zero and 0.1 percent, has said that remain unchanged until inflation reaches 1 percent. Consumer prices excluding fresh food fell 0.6 percent in October from a year earlier.

Investors keep betting the central bank will not end a decade of deflation that the government says it is curbing economic growth. The difference between yields on Japanese government notes and five-year inflation-indexed debt, a gauge of expectations operator of consumer prices was less than 0.65 percentage points today. The five-year average is less than 1.11 percentage points.

The yen gained 11 percent against the dollar this year, reaching a maximum of 15 years of 80.22 per dollar on November 1. The currency traded at 83.81 as of 12:02 pm in Tokyo.