(Bloomberg) -- Fukoku Mutual Life Insurance Co. sees the Bank of Japan raising interest rates as many as two times before the end of March, and plans to invest in the nation’s super-long government bonds under the right conditions.
“If the market factors in a couple rate hikes, yields will rise to a level where we want to step in,” said Junya Morizane, general manager of the insurer’s Investment Planning Department. “If the 10-year yield goes to 1%, and the 20-year yield gets close to 2%, it may reach our target.”
Fukoku is the first life insurer in Japan to announce investment plans for the second half of the fiscal year. Life insurers, the main buyers of domestic bonds due in over 10 years, have combined invested assets of about ¥388 trillion ($2.6 trillion), according to the Life Insurance Association of Japan.
Long-term yields have fallen from their July peaks, putting the 10-year yield at 0.97% and the 20-year yield at 1.75%, after cautious statements on monetary policy from officials. Morizane is predicting that the BOJ will raise raise rates in December or January, after having hiked this year in March and July.
“Japan’s economy and prices will be on track, so once they confirm the situation in the US, the BOJ will steadily proceed with adjusting the level of monetary easing,” said Morizane, who sees a soft landing in the US as possible.
In the second half of the fiscal year, Fukoku plans to increase its holdings of domestic bonds by ¥65 billion, after reducing the balance by ¥80 billion in the first half. Morizane said that if the 20-year yield approaches 2%, there is a “good chance” that the company will switch to a net-increase of its holdings for the entire fiscal year.
He also noted that if yields rise to the upper half of the 2% range in the 20-year or 30-year segment, the company may deploy cash to increase holdings.
The insurer is steering clear of hedged foreign bonds, as the cost of protection is too high and could make returns negative. Fukoku increased foreign bonds without currency hedges by ¥25 billion in the first half of the fiscal year, but will not expand its position in the latter half.
“The US will continue to lower interest rates, so we cannot buy the foreign bonds that we want with the high returns we are looking for,” said Morizane.
Fukoku increased purchases of domestic stocks by ¥40 billion in the first half, taking advantage of the sharp drop in equity prices triggered by the BOJ’s rate hike in July. The insurer also bought high-dividend stocks and shares that it deemed had strong growth potential.
Japan’s currency will mostly stay in a range of ¥140 to ¥150 per dollar, Morizane said, adding that domestic and foreign stocks will be supported by interest rate cuts overseas and strong corporate earnings.
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