Analysis:Japanese insurers are poised to bring money back home - gradually

TOKYO, Oct 15 : Some of Japan's largest asset managers are expected to unveil plans to buy more domestic bonds with markets focusing on whether they would step up divestments of overseas assets to bring money back home.

Although a major reallocation is unexpected, consistent flows home could put a floor under the yen, analysts say, and would come at a time when shifts in Japanese demand are being closely watched because they can move foreign markets.

A possible repatriation of some of the large amounts of capital deployed overseas has been under the spotlight in recent months as Prime Minister Sanae Takaichi's government scrambled to shore up the yen, which dropped to a 40-year low in July.

Japanese life insurers manage about $2.5 trillion in assets, about a quarter of which is held overseas, according to the Life Insurance Association of Japan. Several firms have lately signalled that they were eyeing domestic bonds as yields surged.

"(Life insurers) are cautiously increasing their exposure to JGBs ... Their approach remains one of buying on dips as yields rise."

Ministry of Finance figures show Japanese investors have made net foreign bond sales topping 5 trillion yen ($32 billion) this year, about 289 billion yen worth of which came from life insurers.

In Japan, 10-year Japanese government bond (JGB) yields, which until little more than two years ago were capped by the central bank, have tripled to soar past 3 per cent for the first time in three decades.

Domestic insurers may also step up buying 30-year JGBs as yields consolidate around 4 per cent, while increases in hedge ratios may be a precursor to selling foreign bonds, said Shoki Omori, Deutsche Bank's chief fixed-income strategist for Japan.

"They will stay measured while the BOJ is still raising rates," Omori said. "Some will let hedged foreign bonds run off as they mature. What I do not expect is a broad move to sell foreign bonds and bring the money back into yen."

"Higher yields have brought the buyers back to JGBs," he added. "They have not brought the money home."

Nippon Life, Meiji Yasuda Life and Daiichi Life, which collectively manage nearly 220 trillion yen in assets, are among insurers that are expected to unveil their investment plans next week.

Inflation, rising sovereign debt and growth expectations boosted by the AI boom have driven yields sharply higher across the developed world this year. In Japan, Takaichi's spending plans and tax-cut pledge have also added to market concerns.

A year ago, major Japanese life insurers flagged that they expected to trim their yen-denominated bond holdings and subsequent rises in yields across the curve indicate the market has not found a bottom yet.

Japanese institutions that slashed JGB holdings during the negative-interest-rate era are embarking on a gradual reappraisal of their home market, said Tetsuji Hayashi, a product specialist in Sumitomo Mitsui DS Asset Management's investment department.

"We are starting to see a shift back toward yen bonds," Hayashi said. "As interest rates rise, the 10-year JGB yield has surpassed the FX-hedged 10-year US Treasury yield."

The Bank of Japan raised its key rate to a 31-year high last month and many analysts expect the central bank to raise interest rates again by the end of this year amid persistent concerns over broadening price pressures and yen weakness.

Worries about supply-and-demand dynamics remain across the JGB spectrum as the BOJ reduces its bond holdings and tightens policy while the country's finances remain shaky, said an asset management official at a major life insurance company.

Bond yields in Japan have risen to "fairly attractive levels," but they have yet to peak, said the official, who asked not to be identified as they were not authorised to speak to the media.

"It is still too early to step in," the official said. "The Bank of Japan is not done raising rates, and fiscal concerns have not cleared up either."

(Additional reporting by Noriyuki Hirata. Writing by Tom Westbrook; Editing by Sumeet Chatterjee and Thomas Derpinghaus)

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