Japan's life insurers are swapping lower-yielding bonds for higher-yielding debt to boost portfolio returns. Investment plans from 10 major domestic insurers for the second half of the fiscal year show the strategy is widespread, improving returns even as redemptions leave overall domestic bond holdings flat or lower. Some firms are adding domestic bonds as yields reach attractive levels. The investment plans follow super-long JGB yields climbing to multi-decade highs this year. Japanese investors' purchases of domestic government bonds climbed to the highest in 17 years in the fiscal first half, with insurers among the net buyers alongside trust banks and banks.
Comments from investment executives suggest a positive shift in stance toward JGBs, reflecting increased investment attractiveness following the rise in yen interest rates and the peaking of global interest rate pressures. Insurers may have capacity to buy after holding back purchases amid concerns over further rate increases. Nippon Life Insurance Co., Japan's largest life insurer, expects its domestic bond holdings to decline as it replaces lower-yielding bonds carrying unrealized losses with higher-yielding debt. Current interest rates have reached "quite attractive levels" that "warrant investment." Beyond bond switching, strategies are diverging as insurers respond to market risks. Some are directing new money toward corporate debt, while others are shifting from currency-hedged foreign bonds into domestic debt drawn by higher Japanese yields. Daiichi Life Insurance Co. began investing in gold to diversify its portfolio, while Fukoku Mutual Life Insurance Co. plans to maintain an elevated cash position amid market uncertainty.
Given first-half investment activity and continued net purchases of super-long bonds, life-insurer demand is likely to continue supporting the domestic bond market in the second half. Demand is likely to strengthen at around 3% for the 10-year JGB yield and 4% for the 30-year yield on a simple-yield basis. Japanese insurers have about ¥386 trillion ($2.4 trillion) of invested assets, according to end-July data from the Life Insurance Association of Japan, and changes in their allocation strategies can have implications for both domestic and overseas markets.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing