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Foreign Exchange

Japanese life insurers shy away from EUR assets

The 2011 financial-year results of Japan’s nine leading life insurance companies show they invested conservatively in foreign bonds, favouring USD and AUD paper over EUR-denominated assets.

The latest results reveal that the total value of outstanding foreign assets of the nine main lifers increased from six months ago, reaching ¥22 trillion ($278 billion), as lifers moderately increased holdings of non-European foreign bonds.

Total foreign assets held by Japanese lifers
Source: Nomura
EUR assets
Source: Nomura

Both USD- and AUD-denominated assets increased by ¥1 trillion and ¥0.3 trillion respectively, while EUR-denominated assets were almost unchanged, having declined in the first half of the financial year by ¥1.2 trillion. Japanese lifers have reduced their EUR-denominated assets by almost a third since 2009, and the latest statistics show the EUR share of total foreign assets continues to move lower, now under 20%.

The share of AUD rose to 8.4% from 7.5% and the share of GBP increased to 7.5% from 7.1%. USD assets remained roughly constant at 60.5%.

Share of major currency in total foreign assets 
Source: Nomura

The results also show that the average weighted currency hedge ratio, at 60.4%, was almost unchanged from the 61.1% figure recorded in September. The hedge ratio for USD assets declined slightly from 60.4% to 60%, while the ratio for EUR assets decreased slightly from 64.4% to 63.5%.

“The decline in the hedge ratio for EUR assets was slightly surprising to us, given the tensions in eurozone during the period,” says Yunosuke Ikeda, Tokyo-based FX strategist at Nomura.

Though Nomura says recent balance-of-payments statistics suggest some Japanese lifers re-accumulated exposures in eurozone assets – mainly French bonds – in the first quarter of 2012, renewed tensions in Europe will likely see their conservative stance on foreign bond investments maintained.

According to investment plans for FY2012, outlined in late April, only two lifers said they would accumulate unhedged foreign bonds, though the total amount stated was small, at just ¥230 billion. One lifer outlined plans to liquidate unhedged foreign bond exposures by ¥30 billion in the current financial year.

Nomura says upgraded expectations for USDJPY, and US and Japanese stock markets – after their surge in the first quarter of this year – are also likely to make lifers more bullish on risky assets.

“With renewed concerns over eurozone debt problems and associated declines in government bond yields in advanced economies, lifers are likely to be discouraged from investing in foreign bonds,” says Ikeda.

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