Dai-ichi Life Insurance Co. reported a ¥140 billion ($890 million) loss after selling long-term Japanese government bonds to prepare for an anticipated rise in interest rates. The insurer sold roughly ¥500 billion worth of 20- to 40-year bonds during the first half of its fiscal year ending in September 2024. However, such sales are expected to slow in the second half, according to President Toshiaki Sumino.
“We will continue replacement operations while carefully considering their impact on profits and losses in the next fiscal year and beyond,” Sumino said. Despite the loss, he affirmed that the company’s financial stability remains intact. Dai-ichi holds ¥18.9 trillion in yen-denominated bonds.
Rising Interest Rates and Market Outlook
Sumino anticipates the Bank of Japan (BOJ) will raise interest rates this month, citing the country’s ongoing economic recovery. In December, BOJ Governor Kazuo Ueda opted to maintain rates, awaiting clarity on global economic conditions, including potential policy changes under U.S. President-elect Donald Trump, who takes office this month.
Globally, bond yields have been climbing, fueled by a resilient U.S. economy. Key indicators such as low jobless claims, robust corporate bond sales, and rising oil prices have tempered expectations of additional Federal Reserve rate hikes. U.S. 10-year Treasury yields rose by 40 basis points in December to 4.569% and have since climbed to 4.626%.
“It’s unlikely that interest rates have peaked at current levels, so bond losses due to rising rates are likely to persist,” said Tomoichiro Kubota, senior market analyst at Matsui Securities Co.
Strategic Rebalancing and Long-Term Gains
The bond selloff aligns with Dai-ichi’s broader strategy to manage unrealized losses and improve investment returns. Michael Makdad, a senior analyst at Morningstar Inc., explained that the rebalancing allows the insurer to absorb a significant loss now while positioning itself for higher yields in the future. Gains from equity sales and other factors provide a buffer to support the company’s earnings targets.
Sumino, who became president in April 2023, has been working to rebuild the company’s momentum after a 2020 sales scandal. New annualized premiums reached ¥55.9 billion in the first half of fiscal 2024, a 2.5-fold increase from the same period the previous year and the highest since 2016.
Inflation and Market Polarization
Despite rising rates, Sumino expressed skepticism about Japan’s ability to sustain a 2% inflation target. He expects the upper limit for 30-year bond yields to remain around 2.5%, with 10-year yields capped at 1.5%.
Sumino also voiced concerns about economic polarization, as some Japanese firms report declining profits despite broader recovery signs. Reflecting on his tenure in the U.S. during Trump’s first administration, he noted that while the new presidency might bring opportunities, it could also exacerbate uncertainties for global markets.
Dai-ichi Life’s strategic repositioning highlights its effort to navigate rising rates while preparing for long-term growth, balancing short-term losses with the prospect of improved financial performance in the years ahead..
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