Nippon Life CIO: may buy more European debt, U.S. corporate bonds

[March 02, 2016]  By Tomo Uetake and Hideyuki Sano

TOKYO (Reuters) - Nippon Life Insurance Co, Japan's biggest private life insurer, will likely have no choice but to increase currency-hedged foreign bond investments as domestic bond yields have sunk to negative levels, a top official said.

Hiroshi Ozeki, chief investment officer at Nippon Life, also told Reuters the company expects the moderate recovery in the U.S. economy to continue and that the dollar was unlikely to fall below 110 yen. Nippon Life has total assets of 61.5 trillion yen ($540 billion) under management.

The Bank of Japan's decision in late January to introduce negative rates - a step it had long denied even considering - drove domestic bond yields sharply lower. The 10-year Japanese government bond (JGB) yield fell below zero for the first time on the secondary market three weeks ago and Japan became the first G7 nation to auction 10-year bonds at a negative yield on Tuesday.

That means about 80 percent of JGBs have negative yields - a dire situation for Japanese institutional investors, as JGBs account for the biggest part of their portfolios.
 

HUNT FOR HIGHER YIELD

With Japanese investors searching for alternative due to the squeeze on yields, investments in foreign bonds with currency hedging will likely gather momentum, Ozeki said.

Japanese investors, including Nippon Life, have long favored U.S. Treasuries because of their relatively high yields and due to the depth of the market. But the rising cost of hedging against the dollar is making them much less attractive.

Nippon Life is thus looking more to U.S. credit products, which have much higher yields than Treasuries, as well as some European sovereign bonds.

Countries such as France and Belgium offer relatively attractive yields, Ozeki said, adding that more risk-tolerant investors may buy higher-yielding Italian and Spanish debt.

Financial markets have been hit by concerns about slowing global growth and sliding oil prices early this year. Japan's Nikkei share average fell 8.5 percent in February while safe-haven buying lifted the yen 7.7 percent, its biggest monthly gain since October 2008.

Nippon Life sees limited downside for Japanese stocks and the dollar, expecting the moderate recovery in the U.S. and Japanese economy to continue.

"The market's volatility has been high since early January but we think that the Nikkei's bottom will be around 15,000 to 16,000," he said.

The Nikkei fell to a 16-month low of 14,865.77 last month but stood around 16,750 on Wednesday.

As for the dollar, Ozeki thinks it is unlikely to fall below 110 yen <JPY=> in the near term. It touched a 15-month low near 111 last month.

Ozeki said, however, Japanese institutional investors, including Nippon Life, have limited capacity to buy riskier assets, such as foreign bonds without currency hedging or stocks.

"Banks and life insurers have regulations on capital. You need capital to take risks. And many companies have already increased stocks and foreign bonds within their limitation," Ozeki said.

"So it's not simple as there will be more asset allocation just because we have negative rates," he added.

(Editing by Jacqueline Wong)

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