TOKYO -- Rock-bottom yields on Japanese government bonds have prompted big domestic life insurance companies to step up investment in foreign bonds, mainly U.S. Treasurys.
All nine of the major insurers that released fiscal 2015 investment plans by Friday intend to increase their foreign debt holdings. They expect to pour a total of nearly 4 trillion yen ($33.1 billion) into foreign bonds this fiscal year, according to inquiries by The Nikkei -- the highest level since the global financial crisis.
The insurers plan to cut their JGB holdings by a total of 100 billion yen while keeping investment in Japanese stocks roughly flat.
Meiji Yasuda Life Insurance intends to invest a record 1 trillion yen in foreign bonds this fiscal year. It will mainly buy unhedged bonds exposed to foreign exchange risks in hopes of higher yields.
The U.S. is expected to raise interest rates in the latter half of 2015. If the rate gap between Japanese and American government debt widens further, insurers' foreign bondholdings could rise more than planned.
The companies will mainly invest in Treasurys, for which the yield on 10-year notes is around 2%. Dai-ichi Life Insurance expects a median yield of 0.55% for 10-year JGBs issued in fiscal 2015, compared with 2.5% for equivalent U.S. debt.
Meanwhile, six major insurers, including Meiji Yasuda and Asahi Mutual Life Insurance, plan to scale back JGB investment from fiscal 2014 levels. Nippon Life Insurance and Sumitomo Life Insurance will increase their JGB holdings. But Kazuo Sato, head of investment planning at Nippon Life, says the insurer will buy only the minimum necessary.
Major insurers are largely steering clear of JGBs because long-term rates are stuck at low levels. The longer-maturity instruments they had been buying are offering unattractive yields. Yields on 20-year and 30-year bonds are currently at 1.05% and 1.29%, respectively, below the 1.5% and 1.7% levels seen as necessary to whet the appetite of investors.
With guaranteed yields on new insurance policies at around 1%, insurers are concerned that they will not earn enough returns if they keep investing premium revenue in JGBs. This fear of negative spreads has led to pressure to seek even marginally more promising investment targets.
Insurers are also starting to diversify, boosting investment and financing in such growth fields as infrastructure, green technology and medicine. Dai-ichi Life is involved in project finance, providing funding for a fossil-fuel power plant in the U.S. Nippon Life has started developing logistics facilities to take advantage of anticipated growth in e-commerce demand.
Life insurance products have long terms, making it necessary to buy some long-maturity Japanese government debt. Taiyo Life Insurance says it is watching the market to ensure it can go back to buying JGBs if the yen interest rate improves.