Japanese life insurers cut bullish yen hedges to 14-year low
Nine of Japan's biggest life insurers collectively lowered bullish yen wagers tied to their foreign investment holdings to 44.4% at the end of the fiscal half in March, compared with 45.2% six months earlier, according to an analysis of their earnings reports.
While U.S. President Donald Trump's administration's unpredictable policymaking has stoked foreign exchange market volatility, that wasn't enough to stop a three-year decline in yen hedging. The Bank of Japan's policy interest rate is still 3 percentage points lower than the nation's inflation rate, with the next potential hike seen further delayed.
The continued decline in hedging suggests "life insurers see a lower likelihood of the yen showing the kind of strength it did in the past, and feel a need to hold unhedged overseas bonds to maintain exposure to foreign exchange risks,' said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo. "The yen's real interest rates are just too low.'
Still-high currency hedging costs are also weighing on life insurers' demand for overseas debt.
Japan's 10-year notes yield more than 150 basis points on a compounded basis, much more than counterparts in the United States, United Kingdom, Germany and Australia once foreign exchange protection costs are taken into account, data shows.
Life insurers offloaded a net ¥756 billion ($5.3 billion) worth of foreign bonds in the six months through March 31, Finance Ministry data showed. That marks the seventh consecutive such period of sales.
Insurers dumped a net ¥21.2 billion of overseas stocks in the October-March period after buying ¥1.06 trillion in the six months through Sept. 30.
A gauge that measures the yen's strength against currencies of Japan's major trading partners rose to a six-month high at the time amid broad weakness in the greenback.
But the currency failed to hold gains and finished the second half of the fiscal year 1.6% lower as the BOJ added a reference to trade policies to its list of risks to the outlook for the economy and inflation.
The likelihood of an interest-rate hike shrank further as the central bank this month delayed the expected timeline for reaching its inflation target.
Overnight-indexed swaps signal a 64% chance of the central bank raising interest rates by 25 basis points by the end of the year. At the end of January, markets were fully expecting a quarter point hike or more by December.
The yen's nominal effective exchange rate has edged up 0.8% since March 31. Asset managers and leveraged funds collectively boosted net yen longs to a record via futures and options earlier this month amid speculation the Trump administration's tariff policy will hit the global economy and fuel demand for haven assets.
Unhedged positions risk causing losses should a drop in foreign currencies wipe out capital and income gains from overseas assets. That may prompt life insurers to rush for currency hedging, in turn exacerbating the slump in foreign currencies against the yen.
Swaps, meanwhile, indicate an 83% chance of the U.S. Federal Reserve resuming rate cuts as early as September. Lower U.S. interest rates typically help reduce dollar hedge costs for Japanese investors, which are largely driven by the rate gap between the two economies.
For this reason, "I see a rebound in demand for currency hedges going forward,' said Tsuyoshi Ueno, executive research fellow at NLI Research Institute in Tokyo.
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