(Bloomberg) -- Japan’s life insurers are likely to gradually buy more domestic bonds in the fiscal second half, while awaiting clarity on the central bank’s interest-rate-hike timeline, strategists say.
With combined invested assets of about ¥388 trillion ($2.6 trillion) according to Life Insurance Association of Japan data, the firms will lay out their investment plans starting this week for the six months ending March 2025. The insurers’ huge size makes them one of the most powerful investment entities in Japan, and their plans are closely tracked because of their potential impact on the global debt markets.
The Japanese firms are major investors in super-long bonds due in 20 years or more to match their insurance liabilities, but a pause in the rise of longer JGB yields has made the firms reluctant to rush into those securities. Japan’s 20-year sovereign yield has remained below 2% in the past year, while the 30-year rate has stayed below 2.3% after briefly breaching that level earlier in the year.
With Bank of Japan officials indicating they’re not in a rush to further raise rates, “people want to buy yen bonds again, but interest rate levels aren’t high enough, so if they buy it will only be reluctantly,” said Eiichiro Miura, head of Nissay Asset Management Corp.’s strategic investment department.
If the 20-year government bond yield reaches 2%, life insurers will find it very easy to invest in them, said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. For 30-year debt, an increase in the yield to 2.2% may prompt more buying, said Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo.
As for foreign bonds, while US 10-year Treasury yields still exceed equivalent Japanese rates by about 3 percentage points, high hedging costs may make returns negative.
“They are not going to buy Treasuries because the hedging cost is too expensive,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “In reality, what they’re going to buy is US equities and US credit.”
Unhedged foreign bonds carry the risk that yen-based investors will lose money if the Japanese currency strengthens against the dollar. That’s not a small matter in a foreign exchange market where the yen tumbled to a 38-year low of 161.95 against the dollar in July, only to rebound 16% in little more than two months to as strong as 139.58 after the BOJ pushed ahead with its second rate hike of the year at the end of July.
However, “the risk of a sharp rise in the yen has disappeared, with the lowering of US interest rates already factored in and the BOJ not likely to raise interest rates aggressively,” said Nissay’s Miura. “So there will probably be a slight increase in holdings.”
The nation’s biggest life insurers include Nippon Life Insurance Co., Sumitomo Life Insurance Co., Dai-ichi Life Insurance Co., Japan Post Insurance Co. and Meiji Yasuda Life Insurance Co.
--With assistance from Masaki Kondo.
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