Negative Rates Drive Japan Life Insurers to Take Greater Risks

  • They plan to reduce domestic note holdings as yields plunge
  • Yen-bond investments to be centered around credit: SMBC Nikko

Japan’s biggest life insurers will be looking for returns in corporate bonds and infrastructure lending in the year ahead, as central bank stimulus clouds the outlook for local sovereign debt.

QuickTake Negative Rates

Nippon Life Insurance Co., the nation’s largest, said Friday it plans to restrain buying of Japanese government bonds, while boosting sovereign paper from abroad. Dai-ichi Life Insurance Co. aims to increase “middle-risk, middle-return” investments such as infrastructure project financing as well as currency-hedged overseas debt. Sumitomo Life Insurance Co. will target credit assets including corporate notes abroad. All three plan to either limit or reduce JGB buying in the fiscal year started April 1.

Japanese life insurers, holding over $3 trillion in assets, are finding it hard to meet return targets after the Bank of Japan’s debt-buying stimulus and negative interest rates sent yields on JGB maturities all the way out to 40 years below 0.3 percent. The yen has strengthened about 8 percent against the dollar this year, threatening the central bank’s efforts to end deflation.

Losing Attractiveness

“Yen-bond investments will be centered around credit assets, not JGBs,” said Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo. “Investing in unhedged foreign bonds is a bit worrying given the yen may not necessarily weaken. With hedging costs unlikely to fall, foreign bonds are losing their attractiveness.”

The nation’s 41 life insurers, with total assets of 352 trillion yen ($3.17 trillion), cut holdings of JGBs by 0.8 percent in at the end of January from a year ago, while increasing corporate bonds by 1.2 percent, according to the Life Insurance Association of Japan. Finance Ministry data showed life insurers’ net buying of overseas notes reached 1.415 trillion yen in March, a record high in data going back to 2005.

BOJ Governor Haruhiko Kuroda has said previously his policies are aimed at suppressing rates and encouraging a shift from domestic bonds to riskier assets such as stocks and foreign debt.

‘Severe’ Environment

“Negative rates in Japan expose life insurers to a very severe investment environment,” said Kazuo Sato, the general manager at Nippon Life’s investment planning division on Friday. “The time when we could earn profits from simply investing in domestic bonds won’t be here for a while so we plan to buy credit assets.”

The benchmark 10-year JGB yield was minus 0.08 percent on Monday, rebounding after falling to minus 0.135 percent last week, matching a record low.

Nippon Life plans to boost holdings of overseas and domestic equities. Dai-ichi Life said it aims to increase alternative assets such as private equity while reshuffling hedge-fund holdings to diversify its portfolio risk.

Sumitomo Life is looking abroad to expand credit assets, said Iwao Matsumoto, the insurer’s general manager of investment planning division.

“As domestic yields are expected to stay at low levels, we plan to restrain investments in super-long bonds and expand credit assets,” he said.

Rising Hedging Costs

The increase in hedging costs is prompting a shift to other assets, said Nippon Life’s Sato.

Dollar hedging costs have soared for Japanese investors as the gap between the London interbank offered rates for yen and dollars widened to 66 basis points last week, the most since March 2009, driven by the policy divergence between the Federal Reserve and the BOJ.

“There is no guarantee that we can get returns from hedged foreign bonds a year from now,” Sato said. “We need to aggressively search for new investment targets.”

Dai-ichi Life does not plan to invest in bonds with negative yields, according to Yasuyuki Watanabe, manager of the insurer’s investment-planning department. Instead, it is seeking to boost asset financing projects that generate stable cash flow such as those investing in airplanes, he said.

The insurer’s plan underscores how the industry is being pushed to become even more creative, said Nana Otsuki, chief analyst at Monex Group Inc., a Tokyo-based online securities firm. “The investment environment is gradually getting more severe.”

* The life insurers’ investment plans for FY2016:
===============================================================

CompanyFB OpenFB HedgedJPBJPSFS
Nippon LifeIncreaseIncrease
Weigh FX levels
DecreaseIncreaseIncrease
Dai-ichi LifeWeigh
FX levels
IncreaseIncreaseWeigh
Market levels
Increase
Sumitomo LifeBuy when
yen rises
IncreaseSlightly
reduce
FlatFlat

NOTE: FB = Foreign bonds, FB open = Foreign bonds without
currency hedge, JPB = Japanese bonds, JPS = Japanese stocks, FS
= foreign stocks Unit: Yen
NOTE: Nippon Life groups Japanese and foreign stocks as one category.
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