“We’re seeing some risk-aversive moves in the market. But Japan’s financial system is stable,” Suzuki said at a separate news conference.

Yields on Japanese government bonds plunged to multi-month lows, with 10-year yields sliding to 0.24 per cent 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.

Contagion fears also spurred investors to rein in expectations for how soon the Bank of Japan (BOJ) 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 per cent 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.”

What’s next after 2 historic US bank failures

The TSE banking index ended the day down 7.4 per cent, extending losses after Monday’s 4 per cent slide in the initial reaction to the SVB collapse. The index also dropped 5.4 per cent on Friday after BOJ Governor Haruhiko Kuroda’s final policy decision failed to bring any hawkish shift.

Regional lenders came under the most pressure, with First Bank of Toyama suffering a nearly 12 per cent decline, but giants such as Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group also slid, by 8.6 per cent and 7.6 per cent, respectively.

The Nikkei sank 2.2 per cent at 27,222.04, its worst day in nearly four months. The session low of 27,104.75 had not been seen since February 22.

The broader Topix, which is more influenced by swings in bank stocks than the tech-heavy Nikkei, fell 2.7 per cent to 1,947.54, its biggest drop since late September. At one point it was down as much as 3.2 per cent at 1,935.62, the lowest since January 20.

The steep declines came despite reassurances Finance Minister Suzuki, who told 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, unrealised/realised 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.

Kazuo Ueda joins Japan’s central bank at a policy crossroads

The 30-year JGB yield tumbled as much as 15 basis points to 1.14 per cent, the lowest since late-August, while the two-year yield fell 1.5 basis points to -0.045 per cent.

The benchmark 10-year yield slumped by as much as 6 basis points to 0.24 per cent at its lowest point, a level not seen since November 24, even below the prior 0.25 per cent yield cap before the BOJ’s surprise decision to double it to 0.5 per cent on December 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.

Carmakers tumbled with Nissan, Mitsubishi Motors and Mazda each down at least 5 per cent.

Equities decline, bonds tumble

It came as Asian equities extended declines on Tuesday, led by weakness in financial stocks. A gauge of Asian shares tumbled about 2 per cent and erased all of its gains for this year. Financial stocks were the biggest drag as investors weigh risks in the sector.

The KBW Bank Index on Monday logged its biggest fall since the start of the Covid-19 pandemic, underscoring the dangers.

SVB’s ventures are taken apart in China, UK after US bank’s collapse

A gauge of dollar strength edged higher after erasing its gains for the year on Monday amid a reassessment of the outlook for interest rates.

Swaps traders are now pricing a less than 60 per cent chance the Federal Reserve will hike by another quarter percentage-point later this month.

“A policy mistake is hands down the biggest risk in the market,” Mary Manning, global portfolio manager for Alphinity Investment Management, said on Bloomberg Television. “Controlling inflation but also addressing the fact there is some instability in the banking system is difficult.”

Confusion in India

Meanwhile, a little-known Indian bank moved to assure depositors their money is safe after the collapse of Silicon Valley Bank in California caused confusion and concern due to a similarity in names.

“We request our members, customers and other stakeholders not to pay attention to baseless rumours and mischief-mongering … insinuating similarities in brand names,” SVC said in the statement.

SVC, which has 198 branches across India, held total deposits of $2.23 billion in 2021-22. The statement said SVC has “robust and strong fundamentals”.

Sachin Mane, branch manager at one of SVC’s branches near India’s financial capital Mumbai said on Monday the lender acted as there were rumours circulating on social media about the bank’s financial health.

“There were a few queries from customers but it mostly came from social media rumours … We wanted to communicate before lot of people started asking or before it became a big issue,” said Mane. “It’s just confusion.”

California banking regulators shut down SVB on Friday after a run on the lender, which had US$209 billion in assets at the end of 2022, with depositors pulling out as much as US$42 billion on a single day, rendering it insolvent.

When one Twitter user asked SVC about “rumours about bank default”, the Indian lender said “You have got the Twitter handle wrong. We are SVC Bank … one of the leading & strongest cooperative banks in India with a legacy of 116 years.”

India ‘on cusp of change’ as global manufacturers look beyond China

There were no scenes of panic at two SVC branches in Mumbai suburbs on Monday, with account holders carrying on usual banking activities.

One account holder showed a text message he received from SVC which asked them to not believe any rumours.

“SVC Co-operative Bank Ltd. has no relation with Silicon Valley Bank in California,” it stated.

Additional reporting by Bloomberg