Following the cessation of negative interest rates in Japan, the nation’s life insurers are poised to ramp up their acquisitions of domestic sovereign bonds this fiscal year. These forthcoming investment strategies, set to be unveiled as the new fiscal year commences, carry significant weight in global financial markets due to the substantial combined assets of Japan’s life insurers, totaling $2.6 trillion.
Of particular interest to investors is whether these insurers will repatriate funds and the extent to which they will continue selling foreign debt hedged against potential yen appreciation, considering the associated costs.
Earlier this year, many insurers deferred purchasing Japanese government bonds (JGBs) due to their diminished yields. However, the recent removal of sub-zero interest rates and the yield-curve control program by the Bank of Japan in March, coupled with predictions of further rate increases later this year, have sparked renewed interest. Notably, the yield on 30-year sovereign securities, favored by life insurance companies to fulfill long-term obligations, has surged nearly 30 basis points to 1.92% this year, according to Bloomberg data.
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, noted that the nearing 2% yield on super-long securities presents an attractive proposition for life insurers. She anticipates a continued reduction in foreign bonds with currency hedges, given the relatively limited returns from Japanese bonds, although some overseas debt without hedges may also be added to portfolios.
In January, Fukoku Mutual Life Insurance, Meiji Yasuda Life Insurance, and Japan Post Insurance had all indicated their intention to hold off on purchasing domestic sovereign bonds until yields improved and amid uncertainty surrounding the BOJ’s monetary policy.
Data from the Japan Securities Dealers Association estimates that life and non-life insurers collectively bought a net ¥4.4 trillion ($29 billion) of Japanese bonds in the fiscal year ended March 31, following a net buying of ¥5.8 trillion the previous year. Meanwhile, life insurers offloaded a net ¥2.4 trillion of foreign bonds in fiscal 2023, a decrease from a record sale of ¥14 trillion a year earlier, as reported by the Finance Ministry.
The high costs associated with hedging have historically deterred life insurers from investing in foreign debt. Despite the notable yield gap between U.S. and Japanese 10-year yields, the return from U.S. notes turns negative after accounting for hedging costs against currency fluctuations.
Eiichiro Miura, general manager of fixed-income investment at Nissay Asset Management, suggested that life insurers may signal purchases of foreign sovereign and corporate debt without currency hedges, given expectations of gradual interest-rate cuts by the Federal Reserve and the resilience of the dollar-yen exchange rate following the BOJ’s rate hike.
Although the yen has weakened against the dollar this year, market forecasts anticipate a reversal by year-end. This outlook, coupled with the nation’s life insurers’ imminent investment plans release, underscores the dynamic landscape of Japan’s insurance and financial markets.
