It was a situation that surprised many in the financial world: a low-key lender to Japanese farmers had become something of the biggest buyer of a structured product known as secured loan bonds.

In 2019, Norinchukin Bank held about $70 billion (8 trillion yen) in securities, about one-fifth of the global market for the top-rated category. People called it the CLO whale.

But back in Tokyo, tempers were beginning to crumble. Politicians and regulators were surprised at how much the bank had and began to call it reckless. Nochu, as the lender is known, has been dragged before parliament on several occasions, and some of the criticism has been fierce.

On top of that, a preferential interest rate he was paying on agricultural cooperative deposits was becoming unsustainable. And lawmakers were asking why Nochu wasn’t doing more to help farmers earn money through their regular labor, rather than through exotic investments.

Something had to give. And he did.

By the end of December, Nochu’s CLO holdings had fallen about 40% from their peak, even though they had posted a slight increase in holdings at the end of last year. This raised fears that the bank’s withdrawal could disrupt the market. At the same time, Nochu had stepped up its efforts to help farmers with their businesses. In less than four years, its loans have almost doubled. And he started sending hundreds of consultants to co-ops to provide expertise on agricultural business.

Although Nochu is still a major owner of CLO, he has no plans to significantly increase his holdings from here. The bank never thought its buying strategy was wrong, but it was surprised by the backlash in Japan, and that’s one of the reasons it decided to change course, according to people close of the record, who asked not to be identified while discussing private information. .

“We had taken two different steps” to support Japanese agriculture, Kazuto Oku, president and CEO of Nochu, said during a briefing in November. “One is to pay for returns from financial products and the other is to help with farm finance, advice and business matching,” he said. The focus is now on the second, he said.

The headquarters of Norinchukin Bank in Tokyo | BLOOMBERG

As the bank redeemed its CLOs, its holdings of securities shrank. It fell to around $490 billion in September from around $570 billion in March 2019.

Meanwhile, lending – to businesses related to agriculture, forestry and fishing – rose to $193 billion in September from $102 billion in March 2018. Separately, the number of businesses farms newly financed by Nochu and cooperatives dependent on it increased to 9,417 in fiscal year 2020, which began in April of the same year, from 5,875 in fiscal year 2015.

Nochu’s love affair with CLOs was partly a tale of the low interest rate era. Rates had even turned negative in Japan, and the bank was finding it harder than ever to generate returns on its portfolio. With CLOs, the company could achieve “some spread,” Oku said last year.

But there were other factors as well, some of which went deep into the history of the bank.

Founded in 1923, Nochu serves as the central financial institution for the approximately 3,400 agricultural, forestry and fisheries cooperatives in Japan. The bank receives deposits from cooperatives, rather than directly from farmers, and manages the money through medium and long-term investments.

He has long paid an additional interest rate known as shore cooperatives, which could be, for example, 0.75%, according to people familiar with the matter in the cooperatives. This increased the bank’s need for high returns.

At the same time, Nochu was one of the first major Japanese institutional investors to settle comfortably in international markets. As early as 1997, the bank sent a delegation of about 30 of its best and brightest to the United States and Europe to learn about global diversified investing.

“Our priority was to ensure returns to farmers,” said Masataka Miyazono, a former Nochu employee who made the trip. He is now chairman of the $1.7 trillion Japanese Government Pension Investment Fund, one of many examples of Nochu alumni playing key roles in Japan’s financial industry.

In 2016, Shinjiro Koizumi, then director of the ruling party's agriculture and forestry division, wanted farmers to become financially independent from their agricultural production, rather than relying on returns on investment from Norinchukin Bank.  |  BLOOMBERG
In 2016, Shinjiro Koizumi, then director of the ruling party’s agriculture and forestry division, wanted farmers to become financially independent from their agricultural production, rather than relying on returns on investment from Norinchukin Bank. | BLOOMBERG

Before 1997, things had been easier for Nochu. As Japan entered an era of strong growth after World War II, the bank’s funds began to increase. In 1964, the year of the first Tokyo Olympics, its deposits already exceeded 1 trillion yen.

During the economic bubble of the 1980s, when the long-term prime rate reached 9.5%, farmers began to rely more on investment returns than on income from farming itself. But after the bubble burst and Japanese interest rates gradually declined in the 1990s, Nochu had to look elsewhere for higher yields. Its decision to send employees west in 1997 was part of these efforts.

“It felt like we were a lone long-distance runner looking for the best strategy for us,” said Masanobu Yagi, chief operating officer of Nochu. There was no good example at the time of a strategy to get stable long-term returns from one-year bank savings, he said.

The bank’s knowledge of international markets will work against it during the global financial crisis as investments in secured debt securities turn sour. It was forced to raise billions in fresh capital after suffering huge losses.

Nochu responded by strengthening its risk management and creating new internal reporting and monitoring systems.

And then, convinced of being better protected, she began to invest in CLOs.

In March 2010, it already owned more than $13 billion in securities. That amount tripled to around $50 billion in September 2018, then jumped to around $70 billion in June 2019.

On several occasions from 2019 to last year, Nochu representatives were summoned to parliament to explain the bank’s CLO strategy. In 2020, a senior official at the Financial Services Agency, the country’s financial regulator, warned Nochu that it shouldn’t be a “whale in a small pond”, according to an FSA official. , who asked not to be identified because the information is private. .

“We didn’t anticipate the reaction we would get from the media, the government and our stakeholders,” recalls Yagi. And that would have a big impact on the bank, accelerating its turnaround.

A worker harvests cabbage in Gunma Prefecture.  |  BLOOMBERG
A worker harvests cabbage in Gunma Prefecture. | BLOOMBERG

Meanwhile, Japan had begun to revamp its declining agricultural industry. Agricultural production had fallen 27% since its peak in 1984. Abandoned farmland had increased in three decades and the average age of farmers had risen to 65.9 years.

In 2016, Shinjiro Koizumi, the politician son of former Prime Minister Junichiro Koizumi, called for agricultural reform when he was director of the agriculture and forestry division of the ruling Liberal Democratic Party. He wanted farmers to become financially independent of their agricultural production, rather than relying on returns on investment from Nochu. The bank, in turn, had to participate.

“I asked the general manager many times if it was really sustainable to keep investing overseas and returning the profits to the farmers to cover their living expenses,” recalls Hiroyuki Suematsu, vice minister of agriculture. agriculture, forestry and fishing at the time.

Agricultural technology, such as self-driving systems for tractors and spraying using drones, was booming, and it didn’t take long for Nochu to get on board, according to Suematsu.

For Yasuhiro Hayasaki, a former Bank of Japan and FSA official who joined Nochu as an adviser in 2015, the bank has changed completely since then.

“At first, employees transferred from international investment to agricultural finance reacted as if they were being demoted,” he said. But they soon rejoiced when they realized the bank’s new priorities and the importance of their new role, he said.

Meanwhile, after tough negotiations with the cooperatives, Nochu has since agreed to lower the additional interest rate it pays on deposited funds. This means that he is under less pressure to obtain high returns from offshore investments such as CLOs.

As a result, the bank spent more time advising agricultural enterprises on how to survive without such incentives. Initially, he built a team of 600 people to help cooperatives nationwide increase their profits.

As for these CLOs, they had fallen to around $43 billion by the end of December. The company is still buying from time to time to keep its holdings around the current level. Despite initial fears, Nochu’s pullback did not affect the market as new buyers, mostly US banks, stepped in.

The company will continue to invest in CLOs, a Nochu spokesperson said this month. But he has no intention of aggressively strengthening his positions, he said.

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