Japan's Mitsui Life shifting to euro bonds from dollar due to hedging costs

TOKYO (Reuters) - Mitsui Life Insurance Co plans to shift some funds to euro-denominated bonds from dollar bonds this year, as currency hedging costs for the dollar are expected to rise, a senior company official said on Thursday.

A woman walks past a sign of Japanese life insurer Mitsui Life Insurance Co., Ltd. at the company's headquarters in Tokyo July 27, 2009. The characters read, "Mitsui Life". REUTERS/Stringer

While the company pays close attention to political risks in Europe, it would view a spike in European bond yields triggered by such concerns as a good opportunity to buy, Yoichiro Matsuta, head of the investment planning department, told a news conference.

Japanese investors have stepped up buying of foreign bonds in recent years as an alternative to low-yielding domestic bonds.

In the last financial year ended in March, Japanese insurers bought a record 7.76 trillion yen ($71.2 billion) of foreign bonds. (For a graphic of the trend, see

Because they do not like exposure to foreign exchange fluctuations, they use currency hedging on a large part of their foreign bond investment.

But that strategy is increasingly facing a challenge.

The hedging costs are closely tied to short-term interest rate gaps between currencies and rises in dollar interest rates mean hedging will become costlier for Japanese investors.

On the other hand, because the euro zone’s short-term interest rates are deep into negative territory, hedging for the euro costs almost nothing, or sometimes even produces extra returns.

“To deal with rising dollar hedging costs, we are planning to shift to euros,” Matsuta said.

The company also plans to reduce the overall holding of currency-hedged foreign bonds by around 50 billion yen ($460 million) this financial year, after having boosted it by around 170 billion yen to around 1.1 trillion yen last year, he said.

“Last financial year, because domestic bonds yields had dropped to negative levels, foreign bonds were the only thing we could buy. But now, long-term domestic bond yields have risen. So foreign bonds remain attractive, but less so than last financial year,” he said.

Mitsui Life, which has total assets of about 7.2 trillion yen ($66.1 billion), reduced domestic bond holdings by 50 billion yen last year and plans to lower it further, Matsuta said.

But he added the company could buy long-dated bonds given that their yields have risen after the Bank of Japan started a new policy framework last September, allowing long-term bond yields to rise considerably since then.

Matsuta also said the insurer plans to increase the holding of foreign bonds without currency hedging by more than 100 billion yen.

It has been buying mostly Australian dollar bonds this way to have matching assets for Aussie-denominated products it sells to Japanese customers.

Reporting by Hideyuki Sano; Editing by Chang-Ran Kim and Kim Coghill