Tumbling Yields Have Japan Insurers Boxed in From All Sides
Market Sell-Off Has Japan Life Insurers Boxed in From All Sides
(Bloomberg) -- After decades of surviving ultra-low interest rates and stagnant growth at home, Japan’s life insurers should be perfectly suited to navigate today’s virus-ravaged global investment landscape.
Yet as they map out asset allocation plans for the fiscal year that started this week, the insurers face choices that are so hard one of them isn’t sure about working to any guidelines at all. Another is piling up cash as it plays wait-and-see. All are bracing for wafer-thin investment returns.
With combined assets equivalent to $3.6 trillion, and one-quarter of this in foreign securities, even minor shifts in their allocations reverberate through markets around the world. Early indications are that the insurers will direct more money into super-long Japanese government bonds. They face a dilemma in their two most important overseas markets, with yields on U.S. Treasuries falling and hedging costs for European debt rising.
“Extremely low yields globally are set to put more downward pressure on investment returns for Japanese life insurers,” said Soichiro Makimoto, a senior analyst at Moody’s Japan K.K., who emphasized that they remain financially sound. “Risk levels in their asset management have gradually risen as they stepped up investment in overseas assets.”
Take the example of Taiju Life Insurance Co. It’s been cutting back on overseas bonds and holding cash from redeemed JGBs, with a view to directing more funds into 20-year to 40-year Japanese debt as yields rebound.
“We aren’t panicking in this crisis,” Hiroshi Nakamura, a senior manager in Taiju’s investment planning department, said in an interview last month. “We are a long-term investor and if we can wait, then we’ll wait.”
Yet Taiju has also been looking to buy more Italian and French bonds and right now hedging costs are aggressively eating into the profitability of these trades.
Yen investors had to pay as much as 0.7% to hedge their euro exposure for three months last week, pushing the hedged yield on 10-year French bonds to minus 0.5% -- versus last year’s average of about 0.30%, according to calculations by Bloomberg. While the costs have come down, it’s still a marked turnaround from mid-March when they would be paid for hedging their exposure.
Treasury Yields
Nakamura’s peers at Fukoku Mutual Life Insurance Co. are taking a similar slow-but-sure approach and aren’t ruling out staying on the sidelines if they can’t find good investments. Fukoku had given up on the idea of formulating specific guidelines for asset allocations, one of the company’s general managers, Yusuke Onodera, said in March.
He sees little attraction in benchmark Treasuries with yields below 1% and is even searching for dividends in Japanese stocks -- where prices have plunged this year.
But in a world where liquidity is also a valuable commodity, life insurers can’t ignore Treasuries either. They provide the world with its deepest debt market and Japanese investors as a whole remain the biggest foreign holders of Treasuries.
“Japanese investors will continue to hold a certain amount in foreign assets, especially Treasuries,” said Akio Kato, general manager of strategic research and investment at Mitsubishi UFJ Kokusai Asset Management. “They have to accept a decline in expected returns on income and that means there won’t be a major shift in investment style. High volatility doesn’t make risk-return pay.”
This suggests emerging markets are unlikely to see much money flow in from Japanese life insurers. But they are expected to hunt for bargains in investment-grade credit products and battered stocks.
Corporate Bonds
“Life insurers may want to buy U.S. investment grade corporate bonds,” said Hiroshi Yokotani, managing director and portfolio strategist for fixed income and currencies at State Street Global Advisors. “They could start buying actively when the coronavirus crisis settles down.”
While Japanese investors have net sold overseas debt for three straight weeks, the selling has slowed to just 1.7 billion yen ($15.8 million) for the period ended March 27, according to the latest data from the Ministry of Finance.
The foreign exchange market is a wild card, with the yen blasting from about 112 versus the dollar to 101 -- and then back again -- in the space of just five weeks in February-March. Volatility against the euro is up, although the range of moves has been a little tighter.
While the Federal Reserve and its global peers have taken steps to provide more liquidity for currency trading, hedging costs may remain high. And the risk of the yen surging again later in the year isn’t going away.
That brings Japanese life insurers back to JGBs, where they’ve got by on the tiniest of yields in tough times. There, they’ve got to eye the 40-year debt, where yields have hovered around the 0.40% levels.
“Bargain hunting timing is approaching,” said Shinji Kunibe, general manager of the global strategies investment department at Sumitomo Mitsui DS Asset Management Co. “Among liquid developed markets for debt, super-long 40-year JGBs in particular are attractive because they’ve lagged behind other maturities and may start to catch up.”
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