Unrealised Losses on Japanese Government Bonds Reach ¥7.05 Trillion

Major Japanese banks reported ¥7.05 trillion ($45 billion) in unrealised losses on Japanese government bond (JGB) holdings during the final three months of 2025, according to data released by Risk Quantum. The losses were driven by a sharp selloff in JGBs that intensified late in the year, with Japan Post Bank and Mitsubishi UFJ Financial Group (MUFG) accounting for the largest increases among major financial institutions.

The figure represents the total unrealised losses across the banking sector’s JGB portfolios as of December 31, 2025, marking a record high for the period. While the broader securities portfolios of these banks remained in net gain due to offsetting positions in other assets, the JGB-specific losses underscored the growing vulnerability of balance sheets to rapid shifts in Japan’s government bond market.

Impact on Major Banks

Japan Post Bank and MUFG were identified as the primary contributors to the surge in unrealised losses, though the report did not disclose institution-specific figures. Both banks hold substantial JGB portfolios as part of their traditional banking and asset-liability management strategies, with significant portions classified under held-to-maturity (HTM) and available-for-sale (AFS) accounting categories.

Under HTM accounting, bonds are recorded at amortised cost and not marked to market, meaning unrealised losses do not immediately affect regulatory capital or profit-and-loss statements. However, for securities classified as AFS, unrealised gains and losses flow directly into accumulated other comprehensive income (AOCI), a component of shareholders’ equity that can influence regulatory capital ratios under certain frameworks.

Market Context and Triggers

The losses occurred amid a broader deterioration in Japan’s government bond market, which experienced heightened volatility in late 2025 amid rising expectations of a shift in monetary policy. Analysts cited growing speculation about the potential end of the Bank of Japan’s yield curve control policy and concerns over fiscal sustainability as key drivers behind the JGB selloff.

Broader Financial Implications

While the unrealised losses did not translate into immediate realised losses or capital impacts for most banks due to accounting classifications, they signal growing stress in a market that had been exceptionally stable for decades. The Bank of Japan’s long-standing yield curve control and asset purchase programs had anchored JGB yields near zero, creating predictable conditions that supported widespread use of JGBs as collateral in global funding markets.

The shift away from this stability has raised concerns about the potential for broader contagion, particularly given the large holdings of JGBs by domestic insurers, pension funds, and foreign investors. Earlier reports indicated that Japan’s life insurance sector alone held approximately ¥750 trillion in assets, with significant exposure to both domestic and foreign bonds.

Regulatory and Accounting Considerations

Bank regulators and accounting standard-setters continue to monitor the treatment of unrealised losses in AFS portfolios, particularly as prolonged deviations from amortised cost could eventually trigger impairment tests or affect capital adequacy assessments. For now, most Japanese banks maintain that their JGB holdings remain sound investments held for long-term yield, and that the current market movement does not reflect fundamental credit deterioration in Japanese government debt.

The ¥7.05 trillion in unrealised losses remains a paper loss unless the bonds are sold, and banks have indicated no intention to liquidate these positions at current levels. However, the scale of the loss highlights the sensitivity of Japan’s financial system to changes in bond market dynamics, especially as the country approaches a potential policy shift under new political leadership following the February 2026 general election.