Japan's Insurers Debate Buying Naked U.S. Debt, Euro Switch

(Bloomberg) -- To hedge or not to hedge, that is the question consuming Japanese life insurers.

As investment plans were outlined these last two weeks, currency volatility was the underlying theme. Some like Japan Post Insurance Co., with 77 trillion yen in assets ($705 billion), concluded it can’t risk going naked unless the dollar-yen weakens, while others including Fukoku Mutual Life Insurance have decided U.S. yields are are now high enough to take the risks.

Life insurers in Japan are caught between negative rates at home and the cost of hedging foreign bond positions when investing abroad. Their dilemma has been even more acute this year as dollar has fluctuated between a high of about 113 yen and a low of just below 105 yen, creating havoc with the calculations of cautious lifers.

Japan's Insurers Debate Buying Naked U.S. Debt, Euro Switch

Hedging costs for dollar-yen positions had risen over one percentage point in the last 12-months to 2.59 percent in mid-March, the highest since 2008.

To cope, the insurers have also debated raising holdings of super-long yen bonds, buying more European debt where the euro-yen hedge works to their advantage and putting more money in alternative assets like real estate and infrastructure funds.

Here is a look at some of their thoughts on how they plan to navigate fiscal 2018:

The Need to Go Naked

“We have to shift to unhedged foreign bonds,” said Fukoku Mutual Life Insurance executive officer Takehiko Watabe. Fukoku has 6.8 trillion yen in assets. “The rise in hedge costs is eroding profitability from hedged foreign bond investments, as U.S. monetary tightening boosts short-term rates. We can afford to take currency risks given our solid capital buffer and high solvency margin ratio, and can focus on profitability rather than just seeking to minimize hedging costs,” he said.

“With regards to unhedged foreign bonds we’ll compare them with equities to make our investment decision,” said Toshihiko Yamashita, deputy president and chief executive of Meiji Yasuda Life Insurance’s investment division, which has assets of about 38 trillion yen. “We’ll take account of yield levels and look for chances to increase our holdings when the yen appreciates. Our dollar-yen forecast is 100-118, so we may buy when the dollar falls near the lower end of the range.”

“We plan to boost unhedged dollar bonds when the yen rises, amid expectations that the widening U.S.-Japan interest rate gap will underpin the dollar/yen,” said Iwao Matsumoto, senior executive officer at Sumitomo Life Insurance Co., which has assets of 31.6 trillion yen.

Mitsui Life Insurance Co. plans to increase its holdings of unhedged foreign bond investments by more than 240 billion yen in fiscal year 2018, according to Hitoshi Maegawa, general manager and head of investment planning department of the company.

Nippon Life Insurance Co. will allocate 400 billion yen into unhedged foreign debt for the fiscal year out of the 1 trillion yen in fresh funds.

No Place Like Home?

Yen bonds are not appealing even if 30-year government bonds yielded 1 percent, said Kazuyuki Shigemoto, general manager of Dai-ichi Life Insurance Co.’s investment planning department, which has about 36.8 trillion in assets.

“We plan to restrain investment in super-long JGBs given their depressed yields,” said Sumitomo’s Matsumoto.

Nippon Life said it will consider buying more yen bonds if the 20-year and 30-year yields climb above 1 percent.

Second Half Switcheroo

Daido Life Insurance Co.’s executive officer Yoshihiro Okita said the insurer plans to hedge currency exposure in European bonds while increasing unhedged U.S. bond investments in the first half of the year, then do the opposite in the second half by unhedging European securities and raising the hedge ratio for U.S. ones as it expects the euro to strengthen.

Warning Signs for Stocks

“We may look for a chance to lock in profits in foreign equities as the U.S. economy seems to be slowing down beyond next year,” said Dai-ichi’s Shigemoto.

“We want to book profits from unrealized gains in stocks and put them into internal reserves to brace for market volatility,” said Fukoku’s Watabe.

Old World vs New


“U.S. rates are at very high and attractive levels,” said Meiji Yasuda’s Yamashita. “We aren’t so aggressive about hedged investments for major European bonds with yields still below 1 percent.”

“European bonds are a bit expensive given the longer-term prospect of rising interest rates,” said Fukoku’s Watabe.


“Given the rise in dollar hedging costs, we’ve been shifting out from dollar-denominated foreign bonds and directing funds into euro-denominated bonds,” said Mitsui Life’s Maegawa.

“The rise in hedge costs means we lose returns if we invest in U.S. debt” said Ryosuke Fukushima, a general manager at Japan Post Insurance. “We will focus on those with credit spreads, as with European debt having premiums over hedge costs, we will choose hedged foreign debts with more profitability relative to yen rates assets, including European debts.”

“With dollar-yen hedge costs rising, we plan to diversify investment into other currencies for hedging bond purchases such as the euro,” said Sumitomo’s Matsumoto.

"Given rising U.S. hedging costs, we are shifting out from sovereign bonds, while moving into corporate bonds," said Naoki Akiyama, general manager of finance & investment planning department at Nippon Life. “We are also considering diversifying into other currencies such as the euro."

Is There an Alternative?

“We have started to focus on sustainability investing, since the last fiscal year,” Meiji Yasuda’s Yamashita said. “We are planning to invest about 150 billion yen in the area in various ways through loans, direct investments and buying funds aimed at diversifying and improving our investment.”

Dai-ichi will continue to raise alternative asset allocations after diversifying into infrastructure and foreign real-estate via funds of funds last year, according to Shigemoto.

Nippon Life to Invest 400b Yen in Unhedged Foreign Bonds
Sumitomo Life Eyes Europe Debt For Hedged Foreign Bonds
Japan Post Insurance to Boost Hedged Foreign Bonds
Meiji Yasuda Life to Boost Unhedged Foreign Bond Holding
Daido Life Plans to Boost Foreign Bond Investments
Mitsui Life to Lift Unhedged Foreign Bond Holdings By Over $2.2b

©2018 Bloomberg L.P.