Hideyuki Sanno

TOKYO (Reuters – Japanese insurers have become increasingly wary of buying foreign government bonds, as they do not expect to see the recent rally in the dollar against the yen continue.

According to statements made by the insurers at October press conferences, and to Reuters in October, only two of Japan’s 10 largest insurers stated they would increase foreign bonds between October and March without a currency hedge. The rest either plan to decrease their total holdings or maintain them constant.

U.S. Dollar bonds account for the majority of Japanese insurance company’s foreign bond portfolios.

As they strive to comply with regulatory requirements, many insurers said that they prefer investing in corporate bonds. These bonds offer greater returns than those of sovereign bonds.

We are careful about foreign unhedged bonds. Already, the yen has been significantly depreciated. Hiroyuki Nomura from Japan Post Insurance, said that they aren’t increasing their holdings at the current yen levels.

The dollar hit a four-year high against the Japanese currency at 114.695 yen on Oct. 20, as rising U.S. inflation has fuelled expectations of an earlier-than-expected Federal Reserve rate hike, while the Bank of Japan looks poised to keep interest rates low for some time.

Rising import costs, fuelled by skyrocketing energy prices have weighed down the yen over recent weeks. Slowing export growth has put pressure on the currency as carmakers cut production to meet supply shortages.

Nippon Life, an industry leader expects that the dollar will slip to around 108yen in March. This is a drop from 114yen at present. They also voice scepticism about rising expectations for a U.S. rate increase next year.

Jerome Powell, Chair of Federal Reserve said that last week the U.S. central banks should reduce their support for the economy through a reduction in asset purchases. But they should not touch the interest rate dial.

Fukoku Life had an extensive exposure to the dollar years back when it was below 100 yen. The company’s investment planner Yoshiyuki Suzuki stated that the currency hedges will be used on its international bond investments because the dollar is too expensive.

Japanese life insurers manage 412 trillion Japanese yen (3.61 trillion USD) worth of assets. Over the years, they have also been large investors in foreign bonds.

After having bought 20.5 trillion Japanese yen over the previous six years, they were able to sell foreign bonds net in March 2021.

STILL TOO HIGH

Japan’s leading insurers stated that they are not interested in foreign bonds with currency hedges because of the low return offered.

On inflation fears, the yields of U.S. Treasury bonds on ten years rose to a 6-month peak at 1.705%. However, it remains well below the 2-3% range between 2017-2019.

However, insurers tend to buy higher-yielding corporate bond, even though they provide a lower return than comparable U.S. bonds.

Since March 2013, credit spreads on U.S. bonds markets have narrowed to historic low levels.

Bank of America’s investment-grade corporate bond index over Treasuries fell to 1.07% last week. It was the narrowest spread since 2018, compared to a peak of 4.28% on March 2020 during the worst of the market panic.

Investors will continue to need yield enhancement because of the global low interest rates. According to Akifumi Kai (general manager, investment planning, Dai-ichi Life), credit products demand will continue to be strong.

Japanese insurance firms also plan to boost yen bonds in order to satisfy regulatory requirements. This is partly to meet new solvency regulations in 2025.

($1 = 114.00 yen)