Japanese insurance companies are planning to increase their holdings of Japanese government bonds (JGBs), according to 10 insurers who detailed their investment plans for the fiscal year ending March 2024, at recent media briefings.
Nippon Life Insurance, Meiji Yasuda Life Insurance, and Sumitomo Life Insurance said they would steadily increase JGB purchases if yields rise, driven by a possible tweak in the Bank of Japan’s (BOJ) policy. Changes in the BOJ’s yield curve control (YCC) policy could include widening the trading band of the 10-year bonds, moving the target of the bond duration, or abolishing the policy altogether.
“With a change in the YCC policy in sight, we will start buying JGBs slowly, and buy more when the yields rise,” Akira Tsuzuki, executive officer, finance and investment planning at Nippon Life, told reporters.
Japanese traditional life insurers’ allocation to JGBs as of end-September 2022 was 35%, up from 33% a year earlier, according to Teruki Morinaga, director of insurance at Fitch Ratings Japan. Their allocation to foreign bonds was 20% as of end Sep 2022, down from 22% a year earlier.
And the trend is likely to continue further, Morinaga said. JGB yields have moderately risen in 2022 — from 0.4% to above 1% for 20-years JGBs, for instance. And with the US’s monetary tightening in 2022, currency hedging costs have approximately risen to a hefty 5%.
“As a result, JGB yield has become ‘acceptable’ for Japanese lifers, though not ‘attractive’ yet. Since Japanese lifers need to reduce their interest rate risk/duration mismatch in order to cope with the new regulatory regime based on economic value from 2025, to buy more super long JGB makes sense for Japanese lifers,” Morinaga told AsianInvestor.
Insurers’ primary investment focus is on asset-liability management. For instance, they need to lengthen asset durations to match the super-long durations of their liabilities, most of which are denominated in Japanese yen.
To achieve this, investing in super-long-term JGBs is the only key option in Japan’s bonds markets, according to Soichiro Makimoto, vice president and senior analyst at Moody’s Japan. Insurers face interest rate risk stemming from the duration gap between their assets and liabilities, since liability duration is typically longer than asset duration.
“Hence, investing more in super-long-term JGBs to lengthen asset durations will reduce interest rate risk, leading to a more diversified risk profile, a credit positive,” Makimoto told AsianInvestor.
The insurers have been adding to holdings of super-long debt for asset-liability management purposes, especially towards April 2025, when the economic value-based solvency ratio (ESR) standards will be implemented.
Some insurers are considering buying 30-year JGBs when the yield, which was at 1.23% on May 12, crosses 1.5%.
“We could boost the allocation of the 30-year bonds if the yield rises above 1.5%,” Mitsuo Masuda, head of the investment planning department at Sumitomo Life, told reporters.
Akira Tsuzuki, executive officer of the finance and investment planning department at Nippon Life, told reporters that the insurer will start purchases slowly, but will accelerate buying if yields rise.
“A yield above 1.5% or close to 2% is very attractive,” he said.
Kouhei Horikawa, general manager of the investment planning department at Dai-ichi Life, told reporters, “The central bank will probably continue with monetary easing because the nation is still distant from a sustainable 2% inflation rate target.”
He expects a change to yield-curve control in the first half of the fiscal year and a “temporary pick up” in yields due to a curve control tweak.