Investment Plans for Japan’s Insurers Will Likely Favor JGBs

April 14, 2024

3 minutes read

(Bloomberg) — Japan’s life insurers are likely to buy more domestic sovereign bonds this year after the end of negative interest rates in the country.

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The companies will lay out their investment plans for the new fiscal year starting this month. Global investors pay close attention to the plans of life insurers, which have combined assets of $2.6 trillion, as they often move markets. There is a particular focus on whether they will repatriate funds. The insurers are also expected to flag the continued sale of foreign debt that is hedged against the yen’s appreciation because of the associated costs for protection.

In January, many of the insurers said they were holding off on purchasing JGBs due to low yields. The Bank of Japan removed the sub-zero interest rate and yield-curve control program in March and is predicted to further raise rates later this year. The yield on the 30-year sovereign securities, favored by life insurance companies to meet their long-term obligations, has risen almost 30 basis points this year to 1.92%, according to Bloomberg data.

“Yields on super-long securities are approaching 2%, which is a good level for life insurers to buy,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd. “As yen-denominated securities offer a certain level of returns, they will probably continue to cut foreign bonds with currency hedges. However, since it’s hard to see more than 2% return from the Japanese bonds, they will also add some overseas debt without hedges.

Fukoku Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Japan Post Insurance Co. all said in January that they would hold off from buying domestic sovereign bonds until yields rose and amid uncertainty surrounding the BOJ’s monetary policy.

Life and non-life insurers purchased a net ¥4.4 trillion ($29 billion) of Japanese bonds in the fiscal year ended March 31, according to Bloomberg estimates using data from the Japan Securities Dealers Association, adding to a net buying of ¥5.8 trillion the previous year. Life insurers offloaded a net ¥2.4 trillion of foreign bonds in fiscal 2023 after a record sale of ¥14 trillion a year earlier, according to the latest data from the Ministry of Finance.

Expensive hedging costs have made life insurers avoid foreign debt with hedges in the past few years. While the gap between US and Japanese 10-year yields is still at about 3.5 percentage points, the return from the US notes becomes negative after taking into account the cost of hedging against currency fluctuations, at around 5.4%.

“Life insurers may also indicate purchases of foreign sovereign and corporate debt without currency hedges,” said Eiichiro Miura, general manager of fixed-income investment at Nissay Asset Management Corp. “While the yield gap remains wide and the Federal Reserve is expected to deliver interest-rate cuts only at a gradual pace, the dollar-yen is unlikely to fall that much. The BOJ’s rate hike failed to boost the yen, which is also a reason for not having currency hedges.”

The yen has weakened more than 7.9% against the dollar this year, making it among the worst performing major currencies. Still, the yen is expected to strengthen to 142 per dollar by year-end, compared with a forecast of 135 made at end of last year, according to median estimates in Bloomberg surveys. Swap markets are forecasting two Fed interest-rate cuts this year, compared with more than six cuts predicted at the end of 2023.

As the yen reached its lowest level since 1990 as of Thursday at 153.32 per dollar and is expected to rebound toward the end of this year, the currency is a challenging part for investment abroad.

“Even though concerns about the pace of yen’s appreciation have eased, investors still see the yen strengthening,” said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. “They have to buy overseas debt on dips in the dollar-yen exchange rate. It isn’t easy.”

The nation’s life insurers including Nippon Life Insurance Co., Sumitomo Life Insurance Co., Dai-ichi Life Insurance Co., Japan Post Insurance Co. and Meiji Yasuda Life Insurance Co., will release their investment plans this week and next.