Japanese life insurers, which hold around $740bn in foreign assets, may reduce currency hedging as the cost of doing so increases with the Federal Reserve pushing up US interest rates.
The companies, many of which unveil their second-half investment plans next week, will probably buy more Treasuries if US yields keep rising, according to PineBridge Investments Japan Co. A reduction in hedging may further weigh on the yen, which has dropped against all its major peers in the past six months.
“It wouldn’t be surprising if they lower hedging ratios, with hedge costs rising on expectations for rate hikes that further support the dollar,” said Koji Fukaya, chief executive at FPG Securities Co in Tokyo. “If inflation remains low while the Fed keeps raising rates, a rational conclusion would be to lower currency hedging and buy longer-maturity Treasury bonds.”
The Federal Reserve is expected to raise rates in December, and has indicated it may do so three more times in 2018. The dollar has strengthened more than 5% against the yen from this year’s low in September, while Treasury yields have crept up to make them more alluring to Japanese investors.
Life insurers boosted holdings of medium- to long-maturity overseas bonds by ¥1.77tn ($15.6bn) between April and September, after adding ¥868bn in the previous six months.
“Lifers are likely to follow a similar pattern to the first half of the year, looking overseas as Japanese yield levels make it difficult to aggressively buy domestic bonds,” said Eiichiro Miura, a portfolio manager at Nissay Asset Management Corp in Tokyo. “They could pay more attention to the prospect of a weaker yen as US interest rates are set to keep rising.” Investors could raise their unhedged proportion, he said.
Japanese life insurers held around ¥84tn of foreign securities at the end of July, up from ¥77tn a year earlier, according to data from the Life Insurance Association of Japan. That compares with total assets of ¥363tn.
Hedging costs, calculated using currency forwards, are near the highest since the collapse of Lehman Brothers Holdings Inc in late 2008 amid the global financial crisis. It currently costs 1.89% to hedge dollar-yen positions, up from as low as 0.16% in January 2014.
A study of nine of Japan’s life-insurance companies by Bloomberg shows they cut hedging ratios for investments to 59.4% for the six months ended March 31, down from 63.5% for the previous half.
Japan’s benchmark 10-year bonds yield just 0.075% as the central bank seeks to keep them near zero as part of its efforts to stimulate growth and inflation. Similar-maturity Treasuries yield 2.36%. The spread between the two is close to the widest since May.While Japanese insurers may buy Treasuries due in 10 years or longer if there’s a gradual increase in yields, they may also take a cautious stance.—Agencies