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Japan: Vulnerable banks seek new capital

Japan’s largest banks are mulling the possibility of more capital raising after the Nikkei 225 stock index plunged to a 26-year low and left them looking vulnerable. Mitsubishi UFJ Financial Group, the country’s largest bank, announced on October 27 that it will issue up to ¥600 billion in common shares and up to ¥390 billion in preferred. Mizuho Financial Group and Sumitimo Mitsui Financial Group have been reported by local media to be considering similar measures.

The three megabanks had felt themselves to be in a position to spend excess capital over the last 12 months, as their relatively low exposure to sub-prime related losses enabled them to make a string of high-profile investments in distressed US banks. The collapse of the Tokyo stock market in the closing days of October has left them particularly vulnerable, however, due to their unusually high exposure to domestic equities.

"If you look at the value at risk of the megabanks, they have a huge exposure to Japanese equities," says Hajime Kitano, equities strategist at JPMorgan in Tokyo. "It reminds me of the collapse of the market in 1992, in which the banks’ sensitivity to equity markets as the Nikkei fell from 39000 to 14000 meant they had to sell shares to offset losses, which forced them to sell more shares and so on in a vicious circle."

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