Global Market: Japan life insurers eye domestic bonds as foreign debt selling grows

Japan's major life insurers are divided over their investment plans for the next six months. Some are preparing to increase purchases of domestic government bonds while others remain cautious amid rising yields and shifting global investment trends.

The mixed outlook comes as Japanese investors increasingly retreat from foreign debt markets, potentially redirecting funds towards domestic bonds and influencing yields on long-dated Japanese government bonds (JGBs).

Five of Japan's major life insurers collectively manage about 362 trillion yen ($2.30 trillion) in assets, giving their investment decisions significant influence over domestic bond markets.


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Japan's net sales of foreign long-term bonds have reached 5.18 trillion yen ($32.8 billion) so far this year, the highest level for the corresponding period since 2022. Reuters reported that analysts see the trend as a potential shift in capital allocation towards domestic bonds, supported by rising Japanese yields and concerns over the government's spending policies.

However, investment plans announced by the five insurers over the past week indicate that the shift towards domestic debt is unlikely to be uniform. Meiji Yasuda Life, Japan Post Insurance and Daiichi Life Insurance have signalled an inclination to increase their JGB exposure, while Sumitomo Life is taking a more cautious approach. Nippon Life, Japan's largest life insurer, plans to reduce its JGB holdings for a second consecutive year.

The divergence comes amid concerns that rising Japanese bond yields could trigger a sharp repatriation of domestic investors' overseas holdings, potentially supporting the yen.

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Rising Yields Complicate Investment Decisions

Japanese life insurers have traditionally been major buyers of super-long-term JGBs to match their assets with long-term policy liabilities and meet regulatory requirements. However, their demand moderated after many insurers largely met those requirements.

More recently, a sharp increase in yields, fuelled by concerns over fiscal expansion and government borrowing, has complicated investment decisions as buyers wait for more attractive returns.

The 30-year JGB yield touched a record 4.25% this month before retreating as concerns surrounding the artificial intelligence sector boosted demand for safe-haven assets.

Sumitomo Life is monitoring yield movements closely and plans to reduce bonds held in its asset-liability management portfolio throughout the year, Reuters reported, citing the insurer's investment planning department head, Tadakazu Izumi.

Concerns over persistent inflation and widening government budget deficits have pushed sovereign bond yields to multi-decade highs in several markets. France, which has faced prolonged budget negotiations ahead of an election, has been among the countries under pressure.

Despite the challenges, Nippon Life has indicated that it will retain its French bond holdings, even as higher yields reduce the market value of existing bonds.

The changing investment strategies of Japanese life insurers also reflect a broader global trend towards restoring bond holdings to more neutral levels after several years of investors favouring credit and equities, Reuters reported, citing JPMorgan's head of Japan rates research, Takafumi Yamawaki.

Meiji Yasuda Leads Push for Domestic Bonds

Meiji Yasuda Life has emerged as one of the most bullish insurers on Japanese government debt, indicating that it could purchase as much as 1 trillion yen of bonds, mainly super-long-term JGBs, during the fiscal year ending in March.

The insurer bought 550 billion yen of bonds in the first half of the fiscal year and plans to continue buying even if yields rise further. Its strategy reflects an effort to lock in currently attractive returns rather than wait for further market moves.

Japan Post Insurance has identified opportunities in three-year and five-year JGBs after the recent yield rise and could accelerate purchases in the second half of the fiscal year.

Daiichi Life Insurance, meanwhile, plans to focus on bonds with maturities ranging from 30 to 40 years as it continues to replace securities in its yen-denominated portfolio. Its full-year bond-swap activity is expected to exceed its target of 1 trillion yen.

The strategies suggest that higher yields are beginning to attract some domestic institutional investors back to Japanese government debt, although differences in portfolio requirements and market expectations continue to shape individual decisions.

Foreign Bond Selling Signals Portfolio Rebalancing

Japanese investors sold foreign bonds for a fifth consecutive week through October 17, marking their longest such selling streak since November 2022.

The latest selling could signal the start of a broader shift toward domestic bonds, although the drivers differ from those behind the previous wave of selling, Reuters reported, citing Takuji Okubo, chief economist at Japan Macro Advisors.

In 2022, Japanese investors were retreating from losses on overseas investments. The current shift, however, comes as rising JGB yields have made domestic debt more attractive by comparison.

With the 30-year JGB yield hovering around 4%, institutional investors have greater incentives to rebalance their portfolios towards yen-denominated bonds, Okubo said.

The extent of the shift will depend on future movements in Japanese bond yields, domestic fiscal policy and global market conditions. While some insurers are increasingly willing to lock in higher domestic returns, the cautious strategies of other major players suggest that any repatriation of Japanese capital is likely to unfold unevenly rather than through a sudden, broad-based exit from foreign bond markets.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)