Japan life insurers look to diversify foreign bond holdings

[TOKYO] Japanese life insurers look set to continue increasing their purchases of foreign securities in the second half of the fiscal year, though some say US Treasuries are no longer attractive as currency-hedging costs mount.

Japan's life insurers have traditionally stuck to Japanese government bonds (JGBs), but they have diversified their portfolios over the past several years as domestic debt yields have declined sharply under central bank easing.

Sticking to their game plans for the current fiscal year through March 2017, Japan's nine largest private life insurers plan to keep raising their foreign bond holdings in the second half, according to summaries of investment plans obtained by Reuters in interviews and at news conferences this month.

Their latest investment plans, however, show that the insurers are attempting to move beyond mainstay foreign bond investments such as Treasuries and into a wider variety of credit instruments. "US Treasuries no longer offer an advantage over yen bonds if they are hedged. We thus look for hedged foreign bond investments in non-government debt like residential mortgage-backed securities (RMS)," said Toshihiko Yamashita, chief executive a the investment division of Meiji Yasuda Life Insurance, Japan's third largest private insurer.

Nippon Life Insurance Co, the country's largest private insurer, plans to shift funds to US agency and corporate bonds and European bonds from Treasuries.

Second biggest private insurer Dai-ichi Life Insurance Co said it had been diversifying its foreign bond portfolio to include a variety of currencies and higher-yielding credit products.

Asahi Mutual Life Insurance, meanwhile, plans to start investing in overseas infrastructure for the first time through newly established funds.

Currency hedging costs for Japanese investors have soared on the prospect of higher US interest rates, with returns on Treasuries falling to around zero per cent after deducing hedging costs.

Nippon Life plans to reduce hedging on some of its foreign bond holdings due to the higher dollar hedging costs, while Dai-ichi Life now aims to keep its currency-hedged foreign bond holdings flat in the second half after sharply increasing them in the first half.

Some insurers were still willing to buy foreign bonds without hedging depending on currency levels. Sumitomo Life Insurance said it is ready to buy foreign bonds without currency hedging when the dollar nears 100 yen(S$1.33).

The dollar stood at 104.90 yen on Monday, after rising to a three-month high well above 105 yen the previous week on growing expectations of a U.S. interest rate hike later this year.

REUTERS