Bond Turbulence Complicates Life for Japan’s Insurers

May 24, 2013, 8:27 a.m. ET

Bond Turbulence Complicates Life for Japan’s Insurers

By ELEANOR WARNOCK And KOSAKU NARIOKA

TOKYO—Japanese life-insurance companies, among the country’s biggest institutional investors, say market turbulence is making it harder to purchase Japanese government bonds—though recent yield rises may have made domestic debt more attractive.

Yields have gyrated since the Bank of Japan early last month introduced an easing program by which it will buy JGBs equal to more than 70% of all new issuance this year. But very much contrary to the expectations of both the bank and market participants, the overall effect has been higher yields, amid concerns about the program’s effects on the market.In this new easing environment, life insurers are treading cautiously even if they don’t plan to significantly change their overall strategies.

“When the yields fluctuate this much in the short term, even though long-term yields have risen somewhat, it’s hard to raise our domestic bond holdings aggressively,” Toshihide Fujiwara, executive officer at Fukoku Mutual Life Insurance Co., said at an earnings briefing for Japan’s seventh-largest life insurer by assets.

Top government officials have joined in the expressions of concern about the recent yield jumps.

“Sharp increases in long-term interest rates could have a great impact on the economy and the government’s fiscal condition,” said Prime Minister Shinzo Abe in a parliamentary session Friday. “We expect the BOJ to respond appropriately to any developments in the market.”

Higher yields technically bode well for life-insurance companies, heavy investors in long-term Japanese government debt. That investment strategy, however, is predicated on a stable market.

Fukoku officials said the company, which had ¥5.93 trillion ($58.1 billion) in assets when its fiscal year ended March 31, has planned to increase its domestic bond holdings by ¥100 billion ($983 million) in the current fiscal year. But if concerns remain about being easily able to buy and sell their holdings, the officials said, the company may leave some of those new investment funds in cash.

Sei Sugimoto, head of investment planning at Mitsui Life Insurance Co., Japan’s sixth-largest life insurer, said the company was proceeding slower than planned with domestic bond purchases, even as domestic yields have risen since mid-May. If the company’s normal pace of buying could be compared to the speed of a car, he told reporters Friday, “April was walking speed, and May is a bicycle.”

Of the six insurers presenting their earnings on the day, only one said the yield rises will mean more JGB purchases than initially planned.

“Current (yield) levels allow us to allocate more money to JGBs,” said Hiroaki Tonooka, vice president of No. 2 life insurer Meiji Yasuda Life Insurance Co., which has ¥32.24 trillion in assets.

The other five companies said the market movement since the BOJ launched its massive easing program had not made them reconsider their investment plans. Investment officers said they expect yields to stabilize in coming months as the central bank continues to address market concerns and fine-tune its JGB buying operations.

“There has been some adjustment in operations from what was initially announced aimed at market stability,” said Hiroshi Ozeki, head of investment planning at Nippon Life Insurance Co., whose ¥53.64 trillion in assets tops the list. “I think the market will stabilize gradually on these adjustments.”

According to the Life Insurance Association of Japan, as of the end of March its 43 members held a total of ¥324.7 trillion in investment funds, an amount equal to more than two-thirds the annual output of the Japanese economy.