Japan's Life Insurers Facing Hurdles Wherever They Seek Returns

  • Insurers are in `difficult situation,' says SMBC Nikko
  • Top 4 Japan life insurers expect yen to weaken by March-end

Japan’s biggest life insurers face hurdles wherever they seek returns in the fiscal second half, as Bank of Japan debt buying depresses local yields, the yen shows signs of strength and currency hedging costs soar.

Nippon Life Insurance Co. said Thursday it plans to keep Japanese government bond holdings unchanged, bemoaning local yields, while boosting foreign bonds without hedges. Sumitomo Life Insurance Co. on Tuesday said it plans to buy about 300 billion yen ($2.5 billion) in overseas notes, after buying more than 500 billion yen in first half, while Dai-ichi Life Insurance Co. said it will watch currency moves when managing global debt investments that it increased in the first half. Meiji Yasuda Life Insurance Co. said it plans to boost buying abroad with no hedging depending on yield and exchange-rate levels.

Japan’s life insurers, the biggest holders of the nation’s government bonds after the central bank, are having to hunt far and wide for higher yields as the BOJ’s stimulus makes JGBs scarce. A two-month rally in the yen and a surge in the cost of key derivatives have made overseas investment less appealing. Cross-currency basis swaps show yen holders seeking to borrow dollars were asked to pay the highest premium since December 2011 over Japanese interbank money market rates this month.

Seeking Timing

“Insurers aren’t aggressively buying foreign bonds but rather seeking good timing, as U.S. yields aren’t rising and the yen isn’t weakening as predicted in April, while hedging costs are increasing,” said Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo. “The environment may become more favorable for JGBs but the low yield levels are making them hesitant. They are in a difficult situation.”

Japan’s life and non-life insurers bought a combined net 1.76 trillion yen in super-long JGBs in the first half of the fiscal year that began April 1, down 27 percent from the same period a year ago and the least since the same period in 2007, Japan Securities Dealers Association data showed.

The benchmark 10-year JGB yield has declined to 0.3 percent Friday after reaching the 2015 high of 0.545 percent in June. It reached a record low of 0.195 percent in January.

“We plan to cap investments in super-long maturities and other domestic bonds at current yield levels,” said Kazuo Sato, the general manager at Nippon Life’s investment planning division. “We will only buy minimum amounts of domestic bonds. As a result, allocations to hedged foreign bonds will likely increase.”

Yen Moves

Sumitomo Life plans to invest in foreign bonds without currency hedges as the yen rises toward 115 to the dollar, said Iwao Matsumoto, Sumitomo Life’s general manager of investment planning division.

“Domestic yields are unlikely to rise amid the BOJ’s quantitative and qualitative easing, so allocations will focus around foreign bonds as we diversify our investments ,” Matsumoto said.

Japan’s top four life insurers expect the yen to weaken to between 122 and 125 against the dollar by the end of March. Even so, for now, expectations that the Federal Reserve will refrain from raising interest rates until next year amid signs of slowing global economic growth have spurred demand for Japan’s currency as a haven. It has strengthened about 4 percent to 120.69 per dollar as of 3:52 p.m. in Tokyo since reaching a 13-year low of 125.86 on June 5.

“Hedging costs are rising particularly against the dollar, so hedged foreign bonds and Treasuries are losing their appeal,” said Yasuyuki Watanabe, the manager of Dai-ichi Life’s investment-planning department. “If the yen strengthens temporarily, we’d think of boosting unhedged foreign bonds in the second half. It will depend on currency levels.”

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Japan’s top four life insurers’ investment plans for fiscal second half:

Nippon Life:
* increase FB open
* increase FB hedged
* steady JGBs, increase other JPB slightly
* slightly increase JPS
* increase FS

Dai-ichi Life:
* steady FB open, weighing FX levels
* steady FB hedged
* steady JPB
* weigh mkt levels for JPS
* increase FS

Meiji Yasuda Life:
* increase FB open
* cap FB hedged
* increase JPB
* steady JPS
* increase FS

Sumitomo Life:
* increase FB open (~+300b yen combined for FB open/hedged)
* increase FB hedged
* steady JPB
* steady JPS
* steady FS

Note: FB = Foreign bonds, FB open = Foreign bonds without currency hedge, JPB = Japanese bonds, JPS = Japanese stocks, FS = foreign stocks Unit: Yen

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