Reaching For The Yield In The Land Of 0%

The savings bank owned by Japan’s postal service has become an unlikely global powerhouse in bonds. It had little choice

- Christopher Anstey, with Russell Ward and Taiga Uranaka

The long era of superlow interest rates has reshaped the financial world in some surprising ways. For example, who comes to mind when you think of major players in the global fixed-income market? There are the giant Pimco, BlackRock, and Vanguard funds, of course. But how about Japan’s post office?

Strictly speaking, we’re talking about Japan Post Bank Co., the banking unit of Japan Post Holdings Co., a publicly traded company majority-owned by the government. The postal bank held $577 billion worth of bonds outside its home market in March. That’s more than the investment-grade portfolio at Fidelity Investments or the fixed-income holdings at Britain’s Standard Life Aberdeen Plc. And it’s a big change from a decade ago, when the foreign bond portfolio at Japan Post Bank was negligible.

This new whale on the global bond market hasn’t arrived willingly. Low rates have effectively pushed Japan Post out of the country’s government bond market. Long-term yields in Japan are around 0%, far below even the exceptionally slim rates in the U.S. This has upended a business model at the postal bank that lasted for more than a century. Japan’s postal system set up savings accounts in

1875, growing to become at one point the world’s largest deposit-taking institution. Largely barred from making loans like those of a normal commercial bank, the banking unit plowed those deposits into government bonds. And when yields were well north of 1%, that made for a boring, yet profitable, enterprise. The postal bank now has some $1.7 trillion of deposits, the savings of millions of Japanese households in big cities and remote villages, to invest. But Japan’s bond yields are too low to cover the cost of servicing the bank’s funds, a cost that S&P Global Ratings estimates at 0.57%.