TOKYO -- Alarmed by the prospect of U.S. interest rate hikes, Japanese life insurance companies are purchasing foreign bonds at a much slower pace and shifting more of their investment focus to real estate and infrastructure.
Japan's 10 major life insurers are expected to increase their holdings of foreign bonds by 2.9 trillion yen to 3 trillion yen ($25.9 billion to $26.8 billion) on a net basis, according to their fiscal 2017 asset management plans shared with The Nikkei. That would be down roughly 70% from growth of 8.8 trillion yen in fiscal 2016.
Domestic insurers continue to shy away from Japanese government bonds due to their rock-bottom yields. JGB holdings are forecast to fall by over 3 trillion yen on a net basis. Nippon Life Insurance and some other insurers plan to add more stocks to their portfolios.
The main reason life insurers are taking a cautious approach to foreign bonds is the expectation that the U.S. Federal Reserve Board will raise interest rates two more times this year. "Last fiscal year, we increased [currency-hedged] foreign bonds by 1.9 trillion yen, but this fiscal year will remain flat," a Nippon Life official told reporters on Wednesday. "As the FRB is seen raising rates, we will closely observe trends."
Long-dated Treasury yields currently hover at around 2.3%. If those yields rise along with U.S. policy rate hikes, the value of the bonds will fall, leading to paper losses or decreases in paper profit. Because Japanese life insurers typically invest for the long term, their earnings will not suffer an immediate impact. However, they are already cautious about building up foreign bondholdings in the face of outlooks for higher U.S. yields.
Life insurers also have less funds to devote to asset management. The Bank of Japan's negative rate policy has undercut portfolio returns, forcing the companies to curtail or suspend sales of certain savings-type products. The diminished premium revenue has narrowed the scale of investing.
Japanese life insurers have allocated more funds to bonds hedged against currency fluctuations over the past few years. But the costs associated with those hedges have surged, reducing the appeal of the investments and pushing the companies to scale back.
The insurers are instead investing in infrastructure, real estate and other physical assets in order to shore up profitability. Nippon Life for one has established a section dedicated to structured finance for infrastructure and other purposes. However, moving from foreign bonds into this type of uncharted territory may carry its own risks.
The 10 insurers are: Nippon Life, Dai-ichi Life Insurance, Meiji Yasuda Life Insurance, Sumitomo Life Insurance, Daido Life Insurance, Taiyo Life Insurance, Fukoku Mutual Life Insurance, Asahi Mutual Life Insurance, Mitsui Life Insurance and Japan Post Insurance.