TOKYO (Reuters) - Nippon Life Insurance Co, Japan’s largest private insurer, is increasing investment in foreign bonds without currency hedge, as it sees limited risk of a steadily rising yen, its chief investment officer said on Tuesday.
The insurer has increased unhedged foreign bonds, riskier than hedged ones, in the current financial year to March 31 and is likely to add more to its portfolio in the next financial year, Kazuhide Toda told Reuters.
Most Japanese institutional investors, including Nippon Life, use currency hedging to guard against large swings in foreign exchange rates on a large part of their massive foreign bond investment.
The yen tends to rise against other currencies at times of economic and political stress, cutting the value of Japanese investors’ foreign investment.
“We do not expect the U.S. economy to enter recession in the next couple of years, certainly not this year. U.S. economic data, such as wages and employment, remains solid,” Toda said.
Toda said the company expects the U.S. Federal Reserve to raise interest rates later this year and the dollar to move around the current levels. The dollar stood at 110.80 yen on Tuesday.
Earlier this year, the dollar fell to a two-year low of 104.10 yen in a “flash crash” amid worries about slowdown in the global economy.
“From time to time, we could see moves like that. But that’s not going to change the overall trend,” he said, speaking to Reuters ahead of the company’s official news conference on its investment strategy for 2019/20 expected in April.
Currency hedged foreign bond investments have been popular among Japanese investors for years, but rising costs of dollar hedges due to higher U.S. interest rates are making that strategy increasingly unattractive.
The cost of a three-month hedge now stood at 2.90 percent, above 10-year U.S. Treasuries yield of 2.65 percent, forcing Japanese investors to buy riskier corporate debts.
Against this backdrop, Nippon Life is looking for various alternatives, such as domestic bonds and use of yen interest rate derivatives, including exotic ones, Toda said.
While Japanese bonds are hardly attractive, with the 10-year Japanese government bond yield below zero percent, the downside of the market is limited too, Toda said.
In contrast, yields in the United States and Europe could rise, pushing down bond prices, as their central banks eventually move to tighten policy, he said.
The company holds some UK bonds but has full currency hedge, which Toda thinks would limit damage in case of a “no-deal” Brexit.
“There are many scenarios. If we have a no deal Brexit, the biggest thing to worry about is (reactions in) the currency. We have no exposure there,” Toda said.
British bond prices are likely to gain from any disruptive departure (from the European Union) by the UK, he also said. The company has some UK shares but damage to its investment from a hard Brexit is likely to be mitigated by a fall in sterling, he added.
Elsewhere, the company plans to constantly increase investments in alternative assets, including private equity, hedge funds, real estate and infrastructure.
Being a long-term investor, Nippon Life can afford to invest more in illiquid assets, Toda said.
“Japanese investors have had limited exposure to illiquid assets compared to our foreign peers. We want to step up our efforts here,” he added.
Nippon Life has total assets of 66.7 trillion yen ($602 billion).
Editing by Jacqueline Wong