Last October, when the wounds from the March 2023 bank failures - which surpassed the global financial crisis in total assets and which sparked the latest Fed intervention, setting the market's nadir over the past 16 months - were still fresh, we made a non-consensus prediction: we said that since the Fed has once again backstopped the US financial system, "the next bank failure will be in Japan."

This prediction only got warmer two months later when, inexplicably, Japan's Norinchukin bank, best known as Japan's CLO whale, was quietly added to the list of counterparties for the Fed's Standing Repo Facility, a/k/a the Fed's foreign bank bailout slush fund.

But if that was the first, and still distant, sign that something was very wrong at one of Japan's biggest banks (Norinchukin is Japan's 5th largest bank with $840 billion in assets) today the proverbial canary stepped on a neutron bomb inside the Japanese coalmine, because according to Nikkei, Norinchukin Bank "will sell more than 10 trillion yen ($63 billion) of its holdings of U.S. and European government bonds during the year ending March 2025 as it aims to stem its losses from bets on low-yield foreign bonds, a main cause of its deteriorating balance sheet, and lower the risks associated with holding foreign government bonds."

See, what's happened in Japan is not that different from what is happening in the US, where as the FDIC keeps reminding us quarter after quarter, US banks are still sitting on over half a trillion dollars in unrealized losses, as a result of the huge jump in interest rates which has blown up the banks' long-duration fixed income holdings, sending them trading far below par and forcing banks (and the Fed, see BTFP) to come up with creative ways of shoving these massive losses under the rug.

And while Japanese rates have barely budged - the BOJ only just raised rates for the first time in decades in April - the move is already cascading into the form of huge losses for domestic banks, which have been hammered twice as hard due to their holdings of offshore debt which until 2021 was viewed as risk free, only to blow up in everyone's face two years ago when the bull market since the early 1980s ended with a bang.