Life insurance companies in Japan have increased their allocations into foreign-currency-based investments over the past five years, currently accounting for 22 percent of total invested assets compared with 15 percent in 2011, according to an AM Best briefing.
The briefing suggests that Japanese insurers have increased their overseas investments in search of higher returns, as government bond yields have decreased over the long term, and have been further exacerbated by the introduction of negative interest rates.
Foreign investment have grown 7 percent year-over-year to ¥78.7 trillion (approximately $754.9 billion) through March 31 2016.
A large portion of the foreign assets are bonds, which AM Best said can receive favourable treatment under Japan’s regulatory solvency regime if they are currency-hedged.
The Bank of Japan recently introduced a ‘yield curve control’, which is expected to stabilise Japanese government bond (JGB) yields.
The current quantitative and qualitative monetary easing programme, and the yield curve control programme are both instruments designed to control the yield curve by keeping the 10-year yield at 0 percent, close to the current market rates, in order to avoid excessive yield curve flattening.
The central bank has stated that it wil intervene with the fixed-rated bond purchase action if the long-duration JGB yields spike and deviate significantly from the current levels.
“The new measure is expected to help stabilise the JGB yields while it will limit further steepening beyond the 10-year duration,” said AM Best.
“While stabilisation in long-duration bonds with yields above zero should provide a positive impact on insurers’ earnings and ultimately balance sheet strength, the limited steepening in the yield curve necessities Japanese insurers to further increase overseas investments for higher returns.”
AM Best, North America, Insurance, Life, Asia-Pacific, Investment, Bank of Japan, Japanese government bond, Solvency