Yen Drop Seen as Insurers Look Abroad for Yields: Japan Credit

The world’s lowest-yielding bonds and a weakening currency are encouraging Japanese insurers to look abroad, adding to the exodus of funds from the nation.

Nippon Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co. announced plans last week to boost allocations in foreign debt without protection against currency moves this fiscal year. The yield spread on 10-year U.S. Treasuries over Japanese notes is almost double what it was a year ago when Bank of Japan Governor Haruhiko Kuroda embarked on unprecedented monetary easing that set off the biggest annual slide in the yen in more than three decades.

Japan’s largest holders of domestic debt with more than 10 years to maturity are taking on more currency risk as they forecast the yen will weaken by the end of March and benchmark bonds will trade with yields at or below 1 percent. Sumitomo Mitsui Banking Corp. and Daiwa Securities Group Inc. said this month there’s no effective strategy in Japan’s low-yield, low-volatility environment. Mitsubishi UFJ Morgan Stanley Securities Co. suggested investors look at overseas bonds.

“Life insurers’ plans show they are convinced that yield differentials will widen and the yen will weaken,” said Kiyoshi Ishigane, a Tokyo-based senior strategist at Mitsubishi UFJ Asset Management Co., which oversees more than $78 billion. “Their move will amplify yen weakness.”

Market Forecasts

Nippon Life, Japan’s biggest life insurer, projects the yen will drop to 110 per dollar at the end of March 2015, while Meiji Yasuda said it will be at 105. Dai-ichi Life Insurance Co. and Sumitomo Life both estimate 108. Japan’s four largest life insurers provided median forecasts for 10-year yield ranging from 0.8 percent to 1 percent for the fiscal year-end.

The yen bought 102.13 per dollar as of 11:15 a.m. in Tokyo today. Japan’s 10-year note yielded 0.615 percent.

Japan’s currency weakened to a five-year low of 105.44 in January after plunging almost 18 percent in 2013, the steepest drop since 1979, as Prime Minister Shinzo Abe initiated his economic strategy of fiscal spending, monetary easing and growth initiatives. Kuroda has said the BOJ’s monthly bond purchases of about 7 trillion yen ($68.5 billion) would encourage domestic investors to shift their portfolios to stocks, foreign fixed-income securities and other risk assets.

Shift Abroad

There are signs Kuroda’s policies are encouraging insurers to venture abroad. Japan’s 43 life insurers owned 55.9 trillion yen of foreign securities as of Feb. 28, up from 51.2 trillion yen the previous year, the latest data from the Life Insurance Association of Japan show. The allocation rose to 16.5 percent of holdings from 15.4 percent over the period.

Meanwhile, net purchases of super-long-term JGBs by life and casualty insurers plunged 33 percent to 6.01 trillion yen last fiscal year, the least since the period ended March 2010, data from the Japan Securities Dealers Association showed.

“We seek higher returns by taking some risks on credit, foreign debt and currency,” Toshihiko Yamashita, managing executive officer at Meiji, Japan’s third-largest life insurer, said in a briefing in Tokyo on April 23.

Japanese government bonds maturing in more than a year returned 0.4 percent in the fiscal year ended March 31, the third-worst performer among the 25 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The debt of South Africa and Australia lost 3 percent and 1.1 percent respectively on a yen basis, while Treasuries gained 7.9 percent.

About 60 percent of Meiji’s new funds for investment in foreign debt will not have currency hedges, Yamashita said. The company said last year most of its overseas debt would have foreign-exchange protection.

Domestic Yields

Dai-ichi Frontier Life Insurance Co., a unit of Japan’s second-biggest life insurer, plans to increase overseas debt holdings without currency hedges this year, after boosting such investments by about 350 billion yen last year.

“At current low yields, we can’t buy Japanese bonds periodically,” Tetsuya Kikuta, manager in the investment planning department at Dai-ichi Life, said in a briefing on April 25. “We would look at foreign debt with currency hedges as the main alternative and also consider investing more in unhedged securities depending on currency levels. We have changed our stance on risk taking under the assumption that domestic yields are unlikely to rise because of the BOJ.”

Monetary Policy

Demand for overseas securities may pick up amid expectations the BOJ will expand easing, while the Federal Reserve winds down its third round of quantitative easing.

Japan’s central bank will expand stimulus in July, according to 44 percent of 36 economists in a Bloomberg survey. Measures may include increased buying of bonds, exchange-traded funds and real-estate investment trusts, economists said.

The spread between 10-year Treasury notes and Japan’s debt with similar maturity will widen to 2.54 percentage points by year-end from 2.06 points, analyst estimates compiled by Bloomberg show. It was about 1.25 points on April 3, 2013, the day before Kuroda doubled monthly bond purchases. The Fed and BOJ will both set monetary policy on April 30.

“The BOJ seems to be reluctant at this stage to ease policy further, but we do think that actually over time the Fed tapering plus the risk of BOJ easing in the second half of the year will just push the yen weaker,” Mansoor Mohi-Uddin, the Singapore-based head of foreign-exchange strategy at UBS AG, said in an interview with Bloomberg Television on April 24. “Dollar-yen will go towards 110.”

His estimate compares with 109 year-end median forecast of strategists in a Bloomberg survey.

Nippon Life

Higher domestic yields may encourage Nippon Life to buy more JGBs. The insurer plans to increase its purchases of the debt by more than 400 billion yen this fiscal year and may allocate more funds to the securities than initially planned if 10-year yields rise to 1.2 percent, Kazuo Sato, general manager of investment planning division at the company, said in an April 22 briefing.

“Japanese insurance companies and private pension funds continue to maintain a strong home bias and appetite for JGBs,” the International Monetary Fund said in a report this month. BOJ stimulus “could become much more effective if those private sector asset managers were also to reduce their home bias and contribute to an overall portfolio rebalancing.”

Prospects of a drop in the yen are making Sumitomo Life willing to take a bigger chance on non-Japanese debt. The nation’s fourth-largest life insurer plans to boost foreign debt without protection against currency moves by more than 100 billion yen this year, according to Iwao Matsumoto, the company’s general manager of investment planning.

“As we expect a weaker yen, we’re expanding riskier investments,” he said.

Company       FB Open    FB Hedged  JPB       JPS       FS
Nippon Life  Steady-     Steady-    ~+800b    Steady    Steady
              Increase    Decrease
Meiji Yasuda ~+192b      ~+128b     ~+400b    Decrease  Increase
Sumitomo      Increase              Increase  Steady    Steady
Dai-ichi Life Weigh      Increase   Weigh     Weigh     Increase
              FX levels             yields    Prices    Increase

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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