Japanese life insurers are staying long on Japanese government bonds (JGBs), as they await a possible policy shift by the Bank of Japan (BOJ) away from negative interest rates.
"Based on our discussions with several Japanese life insurers’ management, our understanding of the big picture is that asset allocation shift from foreign bond to super long JGB is ongoing, and it has not changed at this moment,” Teruki Morinaga, director of insurance at Fitch Ratings Japan, told AsianInvestor.
In the meantime life insurers, who are among the biggest buyers of JGBs, are also scanning overseas markets for selective value-for-money investment opportunities.
This comes as a depreciating yen makes hedging costs a costly affair, analysts told AsianInvestor.
However, an auction of the longest 30-year JGBs on September 7 drew limited demand as investors held out for higher yields amid speculation the BOJ will continue to tweak monetary policy. The Ministry of Finance’s sale saw a lower-than-expected cut-off price, indicating poor appetite among buyers.
Morinaga also added that domestic insurers’ haven't been steadily buying JGBs, as the yields have only reached an “acceptable” but not an “attractive” level.
“As of now, since JGB yield has not really risen, it does not surprise us if some life insurers decide to wait and see for a while,” he said.
As of September 20, the yield on 30-year JGBs stood at 1.69%, up 39 basis points over the last 12 months.
HIGH HEDGING COSTS
Moody’s Japan expects Japanese life insurers to continues investing in super-long-term 30-year JGBs. This will lengthen their asset durations and narrow their asset-liability duration gaps, which will reduce risks from changes in interest rates.
“We also expect them to continue gradually taking on more credit risks via overseas credit investments with currency-risk hedges and slightly more alternative investments. Their appetite for super-long-term JGBs can further increase if the domestic rate rises further,” Soichiro Makimoto, vice president and senior analyst at Moody’s Japan, told AsianInvestor.
He also pointed out that foreign sovereign bonds that are hedged for currency risks, mainly US treasuries, are not currently the main option for Japanese life insurers due to the high hedging costs.
“But life insurers can tactically allocate slightly more to such bonds if overseas interest rates, such as those in the US, decline periodically,” he said.
US BONDS APPETITE
At Fitch Ratings Japan, Morinaga still has the view that it does not make sense for Japanese insurers to invest in US Treasuries with currency hedging.
“However, some life insurers told us that they plan to increase US credit products such as corporate bonds of A or BBB ranges if there is good opportunity or value, so some – but not all – Japanese life insurers may increase allocation to US credit products in the second half of 2023,” he said.
Back in August, Japanese investors chose foreign bonds over equities as yields surged and global stocks declined, on fears that higher interest rates could prevail for longer than expected. They purchased ¥1.76 trillion ($12 billion) worth of long-term foreign bonds on a net basis last month after selling about ¥1.64 trillion in July, data showed. Japanese insurers also resumed buying foreign debt for the first time in four months, with purchases to the tune of ¥2.32 trillion.
Last month, US Treasury yields climbed to their highest in 16 years on expectations of an extended period of high-interest rates after US jobs and consumption data pointed to a surprisingly resilient economy.
Still, this movement towards overseas bond investments may not go ahead at steady pace, because it depends on financial markets and opportunities, Morinaga emphasised.
“But we have not changed our big picture [on increasing JGBs preference], with also considering Japan’s new regulatory regime on insurance industry from FY2025 will encourage Japanese insurers to reduce their interest rate risk,” he said.