* 'Abenomics' effects boost interest in foreign bonds
without FX hedges
* Yen bond buying to slow, crowded out by BOJ as QE kicks in
* Volatility, low yields also sap insurer interest in JGBs
* But no drastic moves seen, yen not expected to fall much
By Chikako Mogi and Hideyuki Sano
TOKYO, April 25 Japan's life insurers, potential
global market movers with $3 trillion in assets, have signalled
they may boost their holdings of foreign bonds without currency
hedges to the highest in five years, which could depress both
overseas bond yields and the yen.
But annual investment plans for the fiscal year from April 1
suggest that, while the Bank of Japan's quantitative easing will
squeeze them out of domestic bonds and into U.S. and European
debt, they will make no drastic moves and will remain cautious
on currency hedging. That means their investment strategies will
likely have only a limited impact on the yen.
"If there is appropriate timing, we would like to boost our
allocations to unhedged foreign bonds," said Hiroshi Ozeki,
general manager of the finance and investment planning
department at in Nippon Life Insurance Co, Japan's largest
non-state life insurer.
Japanese life insurers, with a collective 332 trillion yen
($3.34 trillion) in assets including $1 trillion state-owned
behemoth Kampo Life, had been a key force underpinning the
dollar until 2007.
But the dollar's slide to record lows against the yen over
the next five years, in the wake of the financial crisis, eroded
their profits and left them wary of taking on currency risks.
As the BOJ now elbows them out of the domestic bond markets
- which are anyway looking less attractive with higher
volatility and paltry yields - and with monetary easing putting
the yen's uptrend into the rear-view mirror, insurers look ready
to wade further into the foreign bond markets.
Nearly all of Japan's top nine insurers, in interviews with
Reuters or in news conferences over the past two weeks, said
they were either planning to - or at least considering -
boosting their exposure to foreign bonds.
Meiji Yasuda Life Insurance Co, with total assets of about
30 trillion yen, said it tentatively plans to buy about 500
billion yen of foreign bonds this fiscal year, or nearly half
its targeted increase in assets for the year.
Others among Japan's conservative life insurers were less
committal in their comments, but their interest in foreign bonds
"If domestic bond yields stay at low levels for a long time,
we may have to consider the need to shift to foreign bonds,"
Iwao Matsumoto, general manager of investment planning
department at fourth-largest Sumitomo Life Insurance Co, told a
The 10-year Japanese government bond yield
sank to a record low of 0.315 percent after the BOJ's April 4
announcement that it would nearly double its balance sheet in
two years, mostly by buying government bonds.
The bond yield has since bounced back to around 0.6 percent,
but trade remains volatile.
Many insurers said they prefer big, liquid markets, such as
U.S. Treasuries and German bunds, although analysts said French
bonds are increasingly popular for their hefty spreads as are
other high-rated euro zone countries, such as the Netherlands.
Insurers were also uncharacteristically willing to consider
leaving more of their foreign bond holdings unhedged, as the
BOJ's strong reflationary commitment - a pillar of the
"Abenomics" stimulus policies of Prime Minister Shinzo Abe -
pushed the yen to four-year lows versus the dollar. That has
eased the long-running risk that currency appreciation will
erode the value of their overseas assets.
"If there are clear prospects for the yen to fall further,
then we may consider lowering the ratio of hedged foreign bond
buying a bit," Takahiro Ono, Asahi Mutual Life Insurance's chief
portfolio manager, told Reuters in an interview.
The sixth-ranked Japanese life insurer, which had kept its
foreign bond holdings fully hedged, was coaxed by the weakening
yen to trim its hedging ratio to about 90 percent by the end of
the fiscal year to March 31.
But yen bears looking for more yen weakness, and hoping that
insurers' foreign bond purchases might accelerate that, will
likely be disappointed.
The insurers mostly saw limited room for further declines
and will likely continue putting currency hedges on the bulk of
their foreign bond purchases. The cost of hedging also remains
marginal with interest rates low in many parts of the developed
Nippon Life, with some 50 trillion yen in assets, believes
the yen has already substantially priced in the BOJ's easing
effects. It held about 6.64 trillion yen in hedged foreign bonds
and 2.11 trillion yen in unhedged bonds at the end of March.
And while expectations of a shift in Japanese money to
overseas bonds have already helped to bring down yields in the
United State and Europe, while keeping the yen under pressure,
actual capital flow data in recent weeks serves as a reminder
that the talk of foreign bond buying is, still, just talk.
Finance Ministry data on Thursday showed that Japanese
investors sold 862.6 billion yen worth of foreign bonds last
week, for a sixth straight week of net selling.
Insurers will also be watching a variety of risk factors,
such as whether the Japanese government bond market stabilises
or global economic growth picks up, in deciding how much money
to send abroad.
"Growth prospects in the U.S. and China must become solid to
provide an environment for life insurers to take medium- to
longer-term risks on foreign currencies," said Yunosuke Ikeda,
senior currency economist at Nomura Securities.
And while the insurers all expected their pace of JGB buying
to decline this fiscal year, those bonds will remain at the core
of their holdings, since they are counted as risk-free assets
for regulatory purposes and serve as the most suitable assets to
match against long-term liabilities to policy holders.
"The feeling is that we have no choice but to buy, whether
we want to or not," said Sei Sugimoto, head of investment
planning at fifth-largest Mitsui Life Insurance.