In search for yield, Japan insurers target non-government bonds

* Japan insurers hit by low bond yields, high FX hedging costs

* Targetting company and non-govt debt for higher returns

* Many plan increasing alternative investments

* Some concerned global economic growth cycle coming to end

* Table of each company’s plan:

TOKYO, April 25 (Reuters) - As bond yields evaporate globally, many Japanese insurers are looking to secure higher returns at home and abroad by diversifying into riskier corporate and other non-government bonds in the financial year that began this month.

Officials at Japan’s top 10 life insurance companies told Reuters they also plan to allocate more funds to illiquid, alternative assets, such as infrastructure finance and private equity.

The insurers, which collectively manage more than 280 trillion yen ($2.50 trillion), all face the same challenges: persistently low yields in Japan, broad declines in global bond yields and elevated costs for hedging currency risk on dollar assets.

To make up for dwindling income, they are taking more risk.

In a series of interviews, nearly all the firms said they are looking to expand into credit products, such as corporate bonds and mortgage-backed securities, though yields on those products have hovered around historically low levels.

Financial markets are likely to remain supportive “as the world’s major central banks keep accommodative policy stances,” said Toshio Fujimura, head of investment planning department at Sumitomo Life.

“We expect the global economy to continue moderate expansion,” he said.


About half of the insurers’ assets are held in domestic Japanese bonds but they have been increasing their exposure to foreign securities in recent years to counter persistently low returns in Japan, where interest rates have been depressed by years of deflationary pressures.

Yields on major government bonds worldwide have plunged. In Japan and Germany 10-year bond yields are negative.

Those on 10-year U.S. Treasuries hit 1 1/2-year lows earlier this year, while Australia’s equivalent hit a record low earlier this month.

More importantly, for Japanese investors, those yields are lower than the cost of hedging the respective currencies, meaning real returns are negative too.

Thus they are taking on more risk by shifting to corporate bonds and other higher-yielding assets.

Some companies said they would increase purchases of foreign bonds without hedging currency risk, something insurers have been reluctant to do in the past.

“We could increase the holdings to the tune of a few hundred billion yen this year, though we cannot give the exact figure at this point,” Shinichi Okamoto, senior general manager of investment planning at Nippon Life Insurance, told a news conference on Monday.

Another popular area is alternative assets, such as infrastructure, private equity and direct lending, as their returns are higher than more liquid assets such as stocks and bonds.

Still, a few companies, including Dai-ichi Life and Japan Post Insurance, said they would not take big risks, concerned that U.S. economic expansion, already on the verge of becoming the longest in history, could soon start to fade.

“In our view, we’re late in the current economic cycle and uncertainties have been growing over the global economy. So we plan to take a more cautious stance on risk-taking this year,” said Shigeaki Asai, senior general manager of the investment planning department at Japan Post Insurance.

For money invested in Japan, some analysts said insurers could end up returning to government debt because of limited options elsewhere in the economy.

“Because Japanese credit markets are so small, if all insurers jostle in, there will not be much to buy and they may well end up buying government bonds in the end,” said Yusuke Ikawa, Japan strategist at BNP Paribas. ($1=112.14 yen) (Reporting by Tokyo Markets Team; Editing by Neil Fullick)