Japan insurers with $2.7T still keen to invest overseas

(Bloomberg) –Japanese life insurers plan to send more of their $2.7 trillion in investment money abroad, even after surging interest rates prompted them to dump billions of dollars of foreign bonds last year. 

That’s according to Hiroshi Shimizu, chairman of the Life Insurance Association of Japan and chief of the nation’s largest insurer by assets. “If we set our eyes globally, there are many good investment opportunities,” he said in an interview. 

Shimizu’s remarks give a hint at how Japan’s insurers — major investors in foreign bonds — plan to deploy their cash as the global rate-hike cycle peaks. They have been hit hard by aggressive monetary tightening by the US Federal Reserve, underscoring challenges in their pursuit of higher returns amid years of ultra-low yields on assets at home.

Shimizu, who is president of Nippon Life Insurance Co., said recent gains in longer-tenor Japanese government bond yields could trigger a return of investment back home to some degree. But with Bank of Japan Governor Kazuo Ueda signaling he’s in no hurry to normalize policy, Shimizu poured cold water on the idea of a big homecoming of insurance money. 

“There remains uncertainty over monetary policy in Japan,” he said. “So I’m not sure how much we should return to Japan.” 

Life insurers are among Japan’s biggest institutional investors, with a combined portfolio of about 380 trillion yen ($2.7 trillion), according to the association. 

Last year marked a big shift in their strategies. After building up holdings of Treasuries and other foreign bonds in recent years, they were caught off guard by a surge in currency hedging costs, which are closely tied to US interest rates. 

That eroded returns on foreign investment, prompting the life insurers and other Japanese institutions to sell a record amount of overseas bonds in 2022. Investors typically buy protection against foreign-exchange swings when they hold assets denominated in dollars and other foreign currencies.

But Shimizu said overseas markets haven’t lost their lure for life insurers, which need to secure extra returns over what domestic assets can offer. He said credit and equity markets overseas are much bigger than Japan’s and therefore offer more opportunities.

“At Nippon Life, global diversification is one of the important principles of portfolio management,” he said. “Our liabilities are denominated in yen, but given investment opportunities, there is no way but to pursue them.”