Japan's Financial Services Agency (FSA) will inspect the investments of credit unions and credit cooperatives in government bonds and other securities. Analysts believe the FSA appears to be investigating bond valuation losses by these institutions.
The market widely expects the Bank of Japan to accelerate interest rate hikes to curb inflation, leading to an upward trend in long-term interest rates. Holding bonds to maturity does not result in realized losses, but the expansion of unrealized losses can put pressure on financial institutions' management, as they may be unable to quickly sell bonds.
These credit unions and cooperatives absorb deposits and use these funds to make loans locally, playing a role in the flow of funds in the community. However, due to a declining population, fewer residents, and fewer shops and companies, the pool of lenders has decreased accordingly. Meanwhile, the aging population means that deposits entrusted to these cooperatives will either increase or remain unchanged.
Ultimately, the cooperatives managing these funds began purchasing Japanese government bonds, and now hold a large amount. Compared to large banks with diversified assets, the same interest rate increase places a greater burden on these local financial institutions. Problems arise when deposits begin to flow out.
As of 2026, 17 credit cooperatives have already run into deficits. Forced to sell government bonds, these valuation losses inevitably translated into deficits. Selling bonds depresses bond prices and pushes up yields. When interest rates rise, the unrealized losses on unsold bonds held by credit unions further increase, forcing the next credit union to sell as well, creating a vicious cycle.
Analysts speculate that if this cycle is allowed to reinforce itself, the local financial system could collapse. Therefore, the Financial Services Agency intervened at this time to break the cycle and conduct preventative checks.
