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Japan's Asahi Mutual Life Insurance will be more cautious about buying Japanese bonds in the fiscal year that began this month and seek opportunities to buy foreign bonds on dips, after the Bank of Japan's reflationary steps raised uncertainty in the market, a senior official said on Wednesday.
The BOJ's commitment to achieving its 2 percent inflation target in two years, by doubling the monetary base through an open-ended asset-buying scheme, has pushed bond yields down sharply across the curve and sent the yen tumbling against major currencies. The sixth-ranked Japanese life insurer, which had kept its foreign bond holdings fully hedged, lowered its hedging ratio to around 90 percent by the end of the fiscal year to March given the prospects for a weakening of the yen.
Many Japanese insurers are considering boosting their foreign bond holdings and slowing their purchases of domestic bonds in the wake of the BOJ move, which will expand the central bank's buying of government bonds and has increased volatility in bond prices.
"Domestic yields fell after the BOJ's easing steps, and if they remain low, we'd be cautious about boosting investment in domestic bonds and stick as much as possible to buying when yields blip upward," Takahiro Ono, Asahi's chief portfolio manager, told Reuters in an interview.
"Buying foreign bonds will become an alternative option. To the extent possible, we want to seek buying opportunities on dips. Given the more volatile market outlook this fiscal year, it is key for our strategy to adapt flexibly to market changes." The yen tumbled to a four-year low of 99.95 yen against the dollar this month after the BOJ's bold policy announcement on April 4, while the yen's weakening trend has bolstered sentiment for Japanese stocks, lifting the Nikkei stock average to its highest in nearly five years on Wednesday.
Ono said there was still much uncertainty about the currency outlook, with no clear indication yet on whether the US Federal Reserve would consider scaling back its monetary stimulus. At the same time, the BOJ's aggressive easing stance has slightly lessened the risk of the yen firming, a view that led Asahi to cut the hedging ratio, he said. "If there are clear prospects for the yen to fall further, then we may consider lowering the ratio of hedged foreign bond buying a bit," Ono said.
Asahi Life expects the dollar to trade in a 90-110 yen range this fiscal year with 100 yen seen at the end of March 2014, and the euro to trade between 112 and 143 yen with 127 yen seen at the end of the fiscal year. Ono expects the Nikkei to trade between 11,000 and 14,500. Benchmark 10-year Japanese government bond yields will likely move in a 0.3 percent to 0.9 percent range, with 0.7 percent foreseen at the end of March next year. Ono projects 10-year US Treasury yields to range between 1.5 percent and 2.6 percent, with 2 percent likely at the end of next March.
The life insurer plans to keep assets under management around 5.6 trillion yen ($56.36 billion) this fiscal year, little changed from the end of the previous financial year. Asahi Life drew up its investment plan for the current fiscal year last month, before the BOJ's latest policy announcement. That plan called for a net increase in domestic bond holdings of 150 billion yen and a 20 billion yen drop in loans. It also aimed to keep foreign bond holdings steady while further trimming domestic stocks.
Of its domestic bond holdings for the current fiscal year, JGBs were to account for about 80 percent with the rest in regional government bonds and corporate bonds. Among foreign bonds, about 60 percent were seen in US dollars, 30 percent in euros and about 10 percent in Australian dollars. At the end of last fiscal year, Asahi held about 2.9 trillion yen in yen bonds, 650 billion yen in loans, 200 billion yen in foreign bonds and 230 billion yen in Japanese stocks.

Copyright Reuters, 2013

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