By Ayai Tomisawa and Daiki Iga
TOKYO (Reuters) – Fukoku Mutual Life Insurance plans to invest in higher-yielding bonds of European government agencies this fiscal year, especially as a dovish monetary policy tilt in many economies has cut returns from foreign sovereign debt.
Fukoku, which had 6.63 trillion yen (£45.25 billion) in total assets as of March, expects to reduce investments in open foreign bonds, or foreign bonds without currency hedging, as there is a risk of the yen strengthening, Yusuke Onodera, general manager of investment planning at Fukoku, told Reuters in an interview.
Last year, as yields on U.S. government debt rose and hedging costs spiked, the insurer bought foreign bonds without hedging. But as yields started falling this year, the insurer has begun hedging a part of its open foreign bond assets.
“As more than 30 percent of our assets are foreign-denominated assets, we are at a point where we need to prepare for a risk of the rising yen,” Onodera said.
“We would like to rethink our investment strategy which had focused on foreign bonds without hedging. We will start investing in such products as European government-affiliated agencies’ bonds which can generate more returns than Japanese super-long bonds.”
Earlier this month, the U.S. Federal Reserve and the European Central Bank signalled steady interest rates amid a slowing global economy, keeping U.S. and European government bond yields low. Adding to the likelihood of prolonged low global bond yields, the International Monetary Fund last week reduced growth forecasts for 2019.
As of now, about 70 percent of the insurer’s foreign-denominated assets are currency-hedged, up from around 60 percent at the end of March 2019 and from around a half at the end of March 2018.
“There are many potential risk factors, whether it’s Japan’s 10-day Golden Week holiday or Japan-U.S. trade talks or U.S.-China trade talks,” Onodera said.
For the year ending March 2020, Fukoku will invest 20 billion yen in euro-denominated bonds with currency hedging. It will also invest 20 billion yen each in assets without a currency risk such as domestic real estate and Japanese stocks. Of its Japanese equities investment, it plans to put 10 billion yen in growth stocks such as mid-to-small cap firms and start-ups.
“As attractive investment opportunities are limited in the domestic market, we would like to actively look for new investment opportunities including credit products and other foreign assets,” Onodera said, adding that investing in fintech firms might be an option.
Fukoku plans to invest 30 billion yen in domestic and foreign credit assets this fiscal year.
In the last fiscal year ended March, Fukoku increased its holding of foreign-denominated bonds by 100 billion yen. In this category, Fukoku increased 180 billion yen in currency-hedged bonds, while slashing 80 billion yen in bonds without currency hedging, Onodera said.
(Reporting by Ayai Tomisawa and Daiki Iga; Editing by Shreejay Sinha and Shri Navaratnam)