TradingKey - Bloomberg reports that Japanese life insurers have cut their hedge ratios for overseas assets to the lowest level in 14 years, effectively reducing their protection against potential losses from a strengthening yen. This indicates a declining expectation for yen appreciation within the industry.
An analysis of financial reports from Japan's nine major life insurers by Bloomberg reveals that, for the fiscal half-year ended March, these companies reduced their hedge ratios on foreign assets to 44.4%, down from 45.2% six months earlier. By scaling back their yen appreciation bets, these insurers have consequently reduced their hedging activities.
While the Trump administration's erratic policies have led to forex market volatility, the underlying trend of declining yen hedging volumes over the past three years remains unchanged.
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo, noted that the continued reduction in hedge ratios suggests that "life insurers see less likelihood of the yen strengthening as in the past, and they deem it necessary to hold unhedged overseas bonds to maintain forex risk exposure. The real interest rate on the yen is simply too low."
Currently, the Bank of Japan's policy rate stands at 0.5%, roughly three percentage points below the inflation rate of 3.6%. With the central bank delaying its inflation target projection this month, the next rate hike might be further postponed.
Prolonged negative interest rates and high hedging costs have diminished the allure of overseas assets for Japanese investors. According to Ministry of Finance data, life insurers were net sellers of 756 billion yen in foreign bonds in the six months ending March 31, and they offloaded 21.2 billion yen in overseas equities from October to March.
Nevertheless, swap markets show that the Federal Reserve could resume rate cuts as early as September, with a probability exceeding 50%. Since hedging costs are primarily driven by interest rate differentials between countries, a reduction in US rates typically decreases the dollar hedging costs for Japanese investors. "Demand for currency hedges will rebound then," stated Ueno Tsuyoshi, a senior researcher at the Nippon Life Institute in Tokyo.
It is important to note that for unhedged assets, a depreciation in foreign currencies could erase capital and income gains from overseas holdings. This scenario might prompt life insurers to rush into currency hedges, exacerbating declines in foreign currencies against the yen.