TOKYO: Japan's top life insurer, Nippon Life, may increase its foreign bond investment without currency hedging if the yen rises to high levels, while it may reduce its hedged foreign bond holdings because hedging costs are rising, a senior executive said.
Nippon Life, with total assets of 49 trillion yen ($599 billion), also said it plans to allocate about 70 to 80 percent of new money for the financial year that began on April 1, which is expected to be around 1 trillion yen, to Japanese bonds.
The company, also known as Nissay, plans to increase its buying of emerging-market equities, bucking a trend among most Japanese life insurers to shun risky assets.
Nissay expects the global economy to recover moderately this financial year but it believes the recovery will be patchy given limited improvement in the US job market, a possible slowdown in emerging economies and fiscal tightening in Europe. The company thus thinks the yen could see periods of strengthening despite expectations of low interest rates in Japan.
"We expect the yen to be boxed in a range but there will be ups and downs and we expect there could be time when we buy foreign bonds," said Yosuke Matsunaga, general manager of the firm's finance and investment planning department, told reporters on Thursday. His comments were embargoed until Friday.
"We would like to increase our holdings of un-hedged foreign bonds if we can buy them at attractive exchange rates," he said.
While the company did not say at what level it would be ready to buy dollars, it said it expected the US currency to be somewhere in the region of 75 to 95 yen at the end of the current business year, compared with 83.15 yen in March. It expects the euro to stand somewhere between 105 and 125 yen.
At the end of last business year, Nissay held about 2.39 trillion yen of un-hedged foreign bonds. It bought a net 390 billion yen of un-hedged foreign bonds in the year ended last month, the company said.
It held 4.88 trillion yen of hedged foreign bonds, having increased these holdings by 900 billion yen in the last financial year. Investors can hedge their currency exposure to foreign bonds by selling foreign currency in forward contracts.
Matsunaga said the company may reduce its hedged foreign bond holdings as the cost of hedging -- which is determined by interest rate gaps between two currencies -- is rising.
Expectations of credit tightening by the European Central Bank, and to a lesser extent by the US Federal Reserve, have been boosting short-term interest rates in the euro and the dollar in recent months, making currency hedging more costly for Japanese investors.
"We are looking at the cost of hedging, so on the whole, we'll be looking to cut hedged bonds," Matsunaga said, adding that the company has no specific target.
Nissay also plans to increase its yen bond holdings by around 700-800 billion yen, after having increased them by 1.16 trillion yen in 2010/11, it also said.
It expects the 10-year Japanese government bond yield to stay capped initially as the Japanese economy is likely to be shackled by the damage from the earthquake and power supply problems.
But the yield could gradually rise later in the year on recovery in the economy as well as worries about Japan's deteriorating fiscal health as the country needs to pay for reconstruction after the disaster.
Nissay sees the 10-year yield moving between 1.0 and 1.5 percent in the year to March, compared with around 1.2 percent on Friday.
The life insurer is more positive about stocks than many of its competitors, which want to reduce holdings of shares to reduce risk. It said it plans to increase its investment in emerging-economy shares and maintain its holdings of Japanese stocks.
"Dividend income from Japanese stocks is not bad compared with domestic bond yields," said Matsunaga.
Nissay also said it has no plans to reduce its exposure to Tokyo Electric Power Co (TEPCO), the operator of the crippled Fukushima nuclear power plant.
TEPCO shares have fallen about 80 percent since the quake. Nissay holds about 4 percent of the power company's total shares and also holds TEPCO bonds.
"Our yen bond investment is a long-term investment. we will not act hastily even though we pay close attention to market conditions," Matsunaga said.
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