Japan’s biggest life insurers are sticking with plans to reduce holdings of currency-hedged foreign debt this year and buying bonds at home amid speculation of central bank policy tweaks.
(Bloomberg) — Japan’s biggest life insurers are sticking with plans to reduce holdings of currency-hedged foreign debt this year and buying bonds at home amid speculation of central bank policy tweaks.
With combined assets of $2.9 trillion including sizable holdings of securities from US government debt to corporate bonds, their allocation plans are closely watched by investors already worried about the impact of a Bank of Japan policy change on global markets. The insurers expect hedging costs will remain expensive in the current fiscal year from April, a key factor spurring them to cut overseas holdings further, and see BOJ changes coming as early as June.
Lifers decreased holdings of foreign securities to 24% of their total assets at the end of February from about 27% at the end of the previous fiscal year, according to data from the Life Insurance Association of Japan. Ownership of Japanese government bonds increased to 42% from 39% during the same period.
Here are the key takeaways from six major life insurer allocation plans:
Reducing currency-hedged foreign bonds
Fukoku Mutual Life Insurance Co. plans to offload all its currency-hedged foreign debt as it sees hedging costs remaining high on a view the Federal Reserve is unlikely to cut rates this year. “Declines in hedging costs and improvement of profitability cannot be expected,” said Yoshiyuki Suzuki, executive officer and head of investment planning department at the firm.
Others have a similar view, although not as drastic. Dai-ichi Life Insurance Co. also plans to continue reducing holdings of such assets through sales and allowing debt to mature. Japan’s biggest insurer Nippon Life Insurance will keep hedged bond holdings broadly flat after decreasing them in fiscal 2022.The company will focus on foreign corporate bonds that offer attractive yields after hedging costs.
Hedging costs for Japanese investors have eaten away most, if not all, of the returns they get from US sovereign debt. A 30-year Treasury bond with a yield of 3.7% has a negative return with hedging costs now at more than 5%. The Japanese equivalent offers a yield of 1.3%, without currency risk.
More purchases of JGBs
After decades of searching for higher yields abroad, the life insurers are returning to bonds at home where yields have gradually picked up, especially after former central bank Governor Haruhiko Kuroda surprised the market in December by allowing the local benchmark to trade in a wider range. Twenty-year government bonds trade at around 1.1%, compared with under 0.8% a year ago.
Lifers have been adding to holdings of super-long debt for asset-liability management purposes, especially toward April 2025 when a new solvency regime will be implemented. Nippon Life will start purchases slowly but will accelerate buying if yields rise, according to Akira Tsuzuki, executive officer of the finance and investment planning department. “A yield above 1.5% or close to 2% is very attractive,” he said. Fukoku also plans to boost yen-denominated debt.
Sumitomo Life Insurance Co. plans to add super-long bonds and interest-rate swaps amid rising domestic yields and will consider additional investment if they go up more. But Sumitomo and Japan Post Insurance Co., which is also considering additional investment if yields rise at home, see holdings of yen-debt decreasing in fiscal 2023 because of maturing bonds.
BOJ speculation
The life insurers expect the BOJ to either widen the permitted trading range for the 10-year yield or scrap curve control completely this year, a scenario that may make domestic bonds even more attractive on higher yields. Sumitomo Life expects the BOJ to adjust policy in June at the earliest. “We do not rule out the possibility of yield-curve control being removed,” Mitsuo Masuda, general manager of the company’s investment planning department, told reporters.
New BOJ Governor Kazuo Ueda is widely expected to keep policy unchanged at his first monetary policy meeting in charge this week. He has repeatedly said the current ultra-easy monetary policy is appropriate considering current economic and inflation conditions.
Expecting a change to yield-curve control in the first half of the fiscal year, Dai-ichi Life’s general manager of the investment planning department Kouhei Horikawa said “the central bank will probably continue with monetary easing because the nation is still distant from a sustainable 2% inflation rate target.” He expects a “temporary pick up” in yields due to a curve control tweak.
Yen on the rise
All major life insurance companies expect the yen to continue to appreciate this year after rebounding nearly 14% against the dollar from a three-decade low reached last year.
While the BOJ is expected to begin normalization of the policy this year, life insurers expect the Federal Reserve and some other major central banks to end their tightening path, although see rate cuts as unlikely this year. This would mean a steady yield gap between Japan and abroad, slowing the pace of the yen’s appreciation.
Japan Post sees the yen strengthening to 125 per dollar at the end of March 2024 from its current level of around 133.70. While there’s haven demand from lingering concerns about the global financial system, the yen may also face appreciation pressure from lower Treasury yields due to the growing risk of a US economic slowdown, the company said. It sees unhedged foreign debt holdings decreasing amid expectations of a stronger yen.
Buying foreign stocks
Most major life insurers plan to buy equities, especially overseas, to boost returns. They are mixed on the outlook for Japanese stocks amid uncertainty around BOJ policy.
“We plan to allocate a few hundred billion yen for domestic and foreign equities although it all depends on their levels as they are riskier assets,” Sumitomo Life’s Masuda said. Meiji Yasuda plans to reduce Japanese equities to lower risk, while it will increase holdings of overseas stocks.
So far this year, Japanese stocks have modestly outperformed their US peers. The benchmark Topix Index has climbed more than 7%, while MSCI Inc’s gauge of global stocks excluding Japan is up about 6%.
Summary Table
Insurer Forecasts
(Updates yen level and index performances.)
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