Experts weigh in on factors influencing investment decisions
By Roxanne Libatique
Japan’s largest life insurance companies are preparing to unveil their investment strategies for the current fiscal year, at a time marked by heightened economic uncertainty and financial market volatility.
Firms such as Nippon Life Insurance, Dai-Ichi Life Insurance, and Japan Post Insurance – who collectively oversee more than ¥388 trillion (US$2.7 trillion) in assets – are expected to announce their allocations during a series of briefings.
These announcements are closely monitored across global markets, as Japanese institutional investors play a significant role in shaping trends in sovereign debt and foreign exchange.
Their decisions come amid increased turbulence in both domestic and international markets, stemming from evolving US trade policies and the Bank of Japan’s (BOJ) ambiguous monetary path.
Japanese insurers’ investment plans
Yields on Japan’s super-long government bonds – traditionally favoured by insurers for their long-duration liabilities – have surged in recent days.
According to Bloomberg’s report, the volatility has raised questions about how life insurers will adjust portfolios to maintain returns without incurring heightened risk exposure.
Ataru Okumura, senior interest rate strategist at SMBC Nikko Securities, said life insurers are unlikely to commit to definitive positions given current uncertainties.
“There likely won’t be any comments from the life insurers that set their investment stance in stone due to the strong uncertainty surrounding the future of US tariff policy and the BOJ’s monetary policy,” Okumura said, as reported by Bloomberg.
In recent disclosures, Nippon Life said it will continue strengthening its management of domestic bond investments by rotating out of bonds with unrealised losses in favour of higher-yielding alternatives. Meanwhile, Fukoku Mutual Life Insurance has indicated a growing focus on non-traditional assets, including hedge funds and private credit.
Factors impacting investment decisions
This recalibration comes against a backdrop of rising volatility in Japanese bond markets. A measure of implied 30-day volatility in Japan’s 10-year note futures recently hit its highest level in nearly six months, reflecting the market’s reaction to global economic shifts and geopolitical tensions.
Investor sentiment has been further influenced by the US bond market, where prolonged losses have led to reduced speculative positioning.
Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan, noted that sharp price fluctuations have led to diminished liquidity.
“When the price movements are this severe, there are no investors left to buy and sell,” Matsukawa said, as reported by Bloomberg.
Another area of interest is how these firms will adjust their foreign exchange hedging. According to JPMorgan Chase & Co, Japanese institutions have reduced their US dollar hedge ratios to below 30%, the lowest in years.
Analysts suggest this trend could reverse if insurers revise their long-term views on the US economy, potentially pushing hedge ratios above 50%.
Ultra-long bonds
Attention is also on the ultra-long end of Japan’s yield curve, according to Bloomberg. A recent correction in 30-year bonds briefly drove yield spreads over five-year notes to the widest levels since 2002.
While some of the volatility stemmed from expectations of additional government spending, focus has shifted to ongoing US-Japan trade discussions.
Japan’s lead negotiator, Ryosei Akazawa, confirmed that talks are progressing, with hopes of reaching a bilateral agreement soon.
Some analysts speculate that defence expenditure could become part of the negotiations, adding to fiscal pressures that may impact interest rate dynamics.
BOJ monetary path
Meanwhile, expectations for the BOJ’s rate hike have softened. Market-implied odds of a policy increase by year-end have dropped to 44%, down from near certainty prior to recent tariff announcements.
BOJ governor Kazuo Ueda told the Sankei newspaper that the evolving trade landscape poses challenges for Japan’s economy, although he reiterated the central bank’s intent to normalise policy when conditions allow.
Market strategists anticipate that Japan’s life insurers will maintain a conservative stance in the near term.
Ryutaro Kimura, bond strategist at AXA Investment Managers, said that although current yields may appeal to insurers, there is little incentive to accelerate purchases.
“A cautious buying stance will likely be maintained,” Kimura said.
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