Japanese life insurers are re-evaluating their investment allocations for the current fiscal year, reflecting market instability, geopolitical tensions, and changing monetary expectations.
Nippon Life Insurance Co, the nation’s largest life insurer by assets, has announced that its holdings of domestic government bonds are expected to decline, marking the first reduction since fiscal 2016.
After a period of active bond purchasing earlier in April, Nippon Life stated that it plans to reduce exposure to Japanese sovereign debt on a book-value basis.
The insurer cited concerns over liquidity and price fluctuations, particularly in the super-long segment of the bond curve, Bloomberg reported.
Akira Tsuzuki, an executive officer overseeing investment strategy at Nippon Life, noted that the long-end of the bond market is experiencing low liquidity and elevated volatility. He said the pace of buying could change, depending on market developments.
Japan’s major life insurers manage combined assets nearing ¥390 trillion (approximately US$2.7 trillion). Their portfolio decisions are widely monitored due to their potential impact on both domestic and international financial markets.
The current divergence in strategies among these institutions reflects differing assessments of economic risk and monetary direction.
While Nippon Life and Meiji Yasuda Life Insurance Co are scaling back their yen bond positions, firms such as Fukoku Mutual Life Insurance Co and Daido Life Insurance Co are increasing allocations to the same asset class. Other players are turning to foreign securities and alternatives in pursuit of improved returns, according to Bloomberg.
Nippon Life also anticipates that the Bank of Japan (BOJ) may raise its benchmark rate from 0.5% to 0.75% by the end of the fiscal year. It projects a rise in the 10-year government bond yield to 1.4%, up from around 1.31%.
This strategic recalibration comes amid elevated volatility in JGBs, particularly in long-term maturities. A gauge of implied volatility for 10-year Japanese government bond futures recently climbed to its highest level in six months.
Market participants have attributed the shift to growing uncertainty around US trade policy, Japanese fiscal pressures, and global economic trends.
“While life insurance companies are delaying investments due to the high volatility, they are sensing potential in current yield levels,” said Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities, as reported by Bloomberg. “Once the market stabilises, they may enter the market to buy.”
Alongside adjustments to bond holdings, insurers are reviewing their foreign exchange strategies.
Research by JPMorgan Chase & Co indicated that Japanese financial institutions have reduced their hedging of US dollar assets to levels not seen in several years. Should long-term confidence in the US economic outlook improve, hedge ratios could move back above 50%.
Firms such as Fukoku Mutual Life have already begun diversifying into hedge funds and private credit, signalling a broader trend toward alternative investments.
In the ultra-long bond space, recent corrections in 30-year Japanese government securities widened the spread against five-year bonds to levels last observed in the early 2000s. Analysts attribute this to speculation over fiscal stimulus and the status of ongoing trade negotiations between Japan and the US.
Market expectations for a rate hike by the BOJ have also moderated. Current pricing in overnight index swaps suggests a 44% chance of an increase by year-end, compared to a near-certain probability earlier in the month.
