Bank of Tokyo-Mitsubishi UFJ formally quit its role as a primary dealer of Japanese government bonds this July 15

TOKYO -- Bank of Tokyo-Mitsubishi UFJ formally quit its role as a primary dealer of Japanese government bonds this July 15, a move that  reflects the lender's heightened sense of risk over a possible crash in the JGB market.
The Mitsubishi UFJ Financial Group unit ran simulations gauging how fluctuating yields would affect its capital base. The results were not pretty.

The number crunchers found that the capital adequacy ratio would decline by roughly five percentage points if JGB yields increase by 200 basis points across the board. Yields move inversely to bond value. The numbers may be somewhat exaggerated since the estimate was done using earnings figures for fiscal 2012, near the peak of the bank's JGB holding. That said, the lender would have seen its capital ratio cut by a third.
For a long time, Japanese banks regarded JGBs as essentially zero-risk assets when computing capital ratios. Once saddled with mountains of bad loans, the lenders had shied away from smaller businesses -- risky borrowers -- and instead flocked to JGBs, which promised quick profits, and developed a dependency on those instruments.
Nowadays, the safe-haven myth surrounding JGBs is starting to look shaky. When JGBs were generating yields on the plus side, investors suffered no loss if they held on to the bonds to maturity. But now, under the Bank of Japan's negative interest rate policy, JGBs have transformed into loss-laden assets.

Full article at:
http://asia.nikkei.com/Markets/Capital-Markets/Banks-raising-guard-against-possible-JGB-crash?page=1