Japan: Life insurers dump record foreign debt in volatile July

| 09 Aug 2022

Life insurers and pension funds in the country sold record amounts of foreign bonds in July as heightened volatility in global debt markets dampened appetite.

Life insurers disposed of a net JPY1.56 trillion (US$11.6 billion) of the securities, while trust banks’ trust accounts, which are seen as proxies for pension funds, sold JPY865.8 billion of the notes, according to preliminary data from the Finance Ministry. Both sales amounts were the highest ever for the two groups. 

Swings in global bonds have been on the rise as uncertainty over the growth and inflation outlook fuel abrupt shifts in policy wagers. Benchmark Treasury yields have climbed back to around 2.82% from a low of 2.51% reached last week after a robust US jobs report revived bets for another outsized Federal Reserve rate hike. 

Life insurers “remain wary of the continued risk of yields rising again,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “Trust banks’ moves are mainly rebalancing as the drop in yields boosted valuation on their foreign bond portfolios.” 

Overall, Japanese investors’ net selling of foreign bonds, mostly US debt, extended to a record sixth month. 

Rising hedging costs are also weighing on Japanese funds’ demand for foreign securities as they erode returns from investments in overseas debt. 

“Headwinds for Japanese investors in general will continue to make them less active in foreign bond purchases. Trust banks may not keep selling as it’s mostly dependent on yields and rebalancing, but life insurers will likely remain cautious as long as uncertainties linger,” said NLI’s Ueno, according to The Japan Times.