Fukoku Mutual Life Insurance expects a much smaller increase in hedged foreign debt this fiscal year due to rising hedging costs, while it plans to continue making steady investment in equities, a senior company official said on Monday.
With hedging cost rising while the US Federal Reserve is expected to slow the pace of interest rates in 2016 and beyond, Fukoku plans to limit its exposure to hedged foreign debt this fiscal year, Takehiko Watabe, general manager of investment planning, told Reuters.
Japan's seventh-biggest insurer by assets, which has aggressively shifted to foreign bonds from domestic bonds over the past few years, plans to put this strategy on hold.
"US rates are not rising as expected, and hedging cost is rising. This is not a good timing to take currency risks," Watabe said, adding that the insurer's foreign assets already account for 30 percent of its total assets so there is no need to increase further.
With Japanese government bond yield shrinking to record lows under the Bank Of Japan's negative interest rate policy, the insurer plans to keep its domestic bond assets flat this year.
Fukoku will increase investment in hedged foreign bonds by 30 billion yen this fiscal year, much less than an increase of 550 billion yen in the last fiscal year. On the other hand, it is investing in overseas equities by 50 billion yen and 15 billion yen in Japanese equities with high dividend yields, Watabe said.
As for domestic bonds, it will limit its exposure to reinvesting in long-term debt using redeemed debt.
Fukoku, which had 6.53 trillion yen ($60.23 billion) in total assets as of December 2015, cut "open foreign bonds" - foreign bonds bought without currency hedging - by 100 billion yen last fiscal year and that will remain flat this fiscal year.
It sold 300 billion yen worth of domestic bonds last fiscal year, while it bought foreign bonds such as US Treasuries worth 450 billion yen, which resulted in a net 80 billion yen in bond investment in this category.
Fukoku has invested in overseas equities assets through its subsidiaries in New York and London. It will start investing in such Asian equities as exchange-traded-funds in June through its subsidiary Fukoku Life Investments Singapore Pte. Ltd.
"We want to diversify our investment in global equity assets to make up for weakening profitability in our debt assets," Watabe said.
Fukoku expects the Nikkei to trade between 14,500 and 19,000 points this fiscal year. It ended at 16,275.95 on Monday.
It expects the US benchmark 10-year Treasury yield to move between 1.5 percent and 2.5 percent, compared with 1.7 percent on Friday, and the 10-year JGB yield between negative 0.15 percent and 0.4 percent, against 0.3 percent on Monday.
It predicts the 20-year JGB yield to fluctuate between 0.25 percent and 0.9 percent.
Fukoku sees the dollar trading between 105 and 120 yen, versus 108.38 yen, while the euro is seen trading between 115 and 138 yen, compared with 122.53 yen.
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