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TOKYO: Japanese banking shares on Tuesday were set for their biggest tumble since the onset of the COVID-19 pandemic, dragging the Nikkei share average down more than 2%, as investors tried to gauge the fallout from the collapse of two US lenders.

Yields on Japanese government bonds plunged to multi-month lows, with 10-year yields sliding to 0.24% for the first time since last November - as they tracked US peers amid a global flight to quality.

Yield curves have flattened, putting additional weight on banks by cutting the outlook for lending profit.

Fallout from the collapse of Silicon Valley Bank and Signature Bank widened overnight, despite government efforts to shore up confidence.

Contagion fears also spurred investors to rein in expectations for how soon the Bank of Japan could loosen or even scrap its peg on long-term JGB yields - bets that had driven the Tokyo Stock Exchange’s banking index up nearly 28% since late-December to the highest since 2015 last week.

“The pressure to unwind positions is extremely big here,” said Yunosuke Ikeda, chief equity strategist at Nomura Securities. “Hopes have been dashed for near-term BOJ policy normalisation.”

The TSE banking index was down 7.2%, as of 0500 GMT, extending losses after Monday’s 4% slide in the initial reaction to the SVB collapse.

The index dropped 5.4% on Friday after BOJ Governor Haruhiko Kuroda’s final policy decision failed to bring any hawkish shift.

HSBC buys failed US bank SVB’s UK arm for £1

Regional lenders came under pressure, with First Bank of Toyama suffering a nearly 11% loss, but giants such as Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group each slid around 8%. The Nikkei was 2.2% lower at 27,211.09, not far from the session low of 27,104.75, a level last seen on Feb. 22.

The broader Topix, which is more influenced by swings in bank stocks than the tech-heavy Nikkei, sank 2.6% to 1,948.90, and was at one point down as much as 3.2% at 1,935.62, the lowest since Jan. 20.

The steep declines came despite more reassurances from Japanese officials, with Finance Minister Shunichi Suzuki telling reporters on Tuesday he did not expect SVB’s failure to have a big impact on Japan’s economy or financial system.

He declined to comment on its potential impact on BOJ policy.

“At this moment I don’t see any signs of bank runs in Japan,” said Norihiro Yamaguchi, senior economist at Oxford Economics.

“Yes, unrealized/realized losses from foreign bond investments among Japanese banks are increasing, and surely it will weigh on their profit,” he said.

“But it won’t mean that they are illiquid or insolvent.” The lending outlook has darkened with diminishing bets for both BOJ policy tweaks and additional tightening by the US Federal Reserve, compressing yield curves at home and abroad.

The 30-year JGB yield tumbled as much as 15 basis points to 1.14%, the lowest since late-August, while the two-year yield fell 1 basis point to -0.040%.

The benchmark 10-year yield slumped 6 basis points to 0.24%, the lowest since Nov. 24, even below the prior 0.25% yield cap before the BOJ’s surprise decision to double it to 0.5% on Dec. 20.

The yen strengthened versus the dollar against the backdrop of a less-hawkish Fed, reaching a one-month high of 132.295 overnight, although it retreated to 133.87 on Tuesday.

A stronger yen puts pressure on exporters by cutting the value of their overseas revenue. Automakers tumbled with Nissan, Mitsubishi Motors and Mazda dropping between 4.9% and 5.7%.

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