Japan’s insurers likely to buy more domestic sovereign bonds for investments

TOKYO: Japan’s life insurers are likely to buy more domestic sovereign bonds this year after the end of negative interest rates in the country.

The companies will lay out their investment plans for the new financial year starting this month.

Global investors pay close attention to the plans of life insurers, which have combined assets of US$2.6 trillion, as they often move markets.

There is a particular focus on whether they will repatriate funds. The insurers are also expected to flag the continued sale of foreign debt that is hedged against the yen’s appreciation because of the associated costs of protection.

In January, many of the insurers said they were holding off on purchasing JGBS due to low yields.

The Bank of Japan (BOJ) removed the sub-zero interest rate and yield-curve control programme in March and is predicted to further raise rates later this year.

The yield on the 30-year sovereign securities, favoured by life insurance companies to meet their long-term obligations, has risen almost 30 basis points this year to 1.92%, according to Bloomberg data.

“Yields on super-long securities are approaching 2%, which is a good level for life insurers to buy,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd.

“As yen-denominated securities offer a certain level of return, they will probably continue to cut foreign bonds with currency hedges.

“However, since it’s hard to see more than a 2% return from Japanese bonds, they will also add some overseas debt without hedges.”

Fukoku Mutual Life Insurance Co, Meiji Yasuda Life Insurance Co and Japan Post Insurance Co all said in January that they would hold off from buying domestic sovereign bonds until yields rose and amid uncertainty surrounding the Boj’s monetary policy.

Life and non-life insurers purchased a net 4.4 trillion yen (Us$29bil) of Japanese bonds in the financial year ended March 31, according to Bloomberg estimates using data from the Japan Securities Dealers Association, adding to a net buying of 5.8 trillion yen the previous year.

Life insurers offloaded a net 2.4 trillion yen of foreign bonds in the financial year 2023 after a record sale of 14 trillion yen a year earlier, according to the latest data from the Finance Ministry.

Expensive hedging costs have made life insurers avoid foreign debt with hedges in the past few years.

While the gap between US and Japanese 10-year yields is still at about 3.5 percentage points, the return from the US notes becomes negative after taking into account the cost of hedging against currency fluctuations, at around 5.4%.

“Life insurers may also indicate purchases of foreign sovereign and corporate debt without currency hedges,” said Eiichiro Miura, general manager of fixed-income at Nissay Asset Management Corp.

“While the yield gap remains wide and the US Federal Reserve is expected to deliver interest rate cuts only at a gradual pace, the US dollar-yen is unlikely to fall that much. The Boj’s rate hike failed to boost the yen, which is also a reason for not having currency hedges.”

The yen has weakened more than 7.9% against the US dollar this year, making it among the worst-performing major currencies. — Bloomberg