TOKYO: Japan's Aioi Nissay Dowa Insurance, which has assets of around 3 trillion yen ($26.73 billion), increased its holdings of unhedged foreign bonds in the first half of the fiscal year through September and is mulling buying more in the second half, a senior official said.
Faced with low domestic yields, which have been driven down by the central bank's extensive monetary easing, Japanese institutional investors have increasingly sought better returns abroad.
Hedged foreign bonds are a safer bet for investors as they offer protection from potentially unfavourable currency exchange rate fluctuations but they also incur more costs compared with unhedged investments.
"We are considering buying more unhedged foreign bonds in the second half than initially planned while buying fewer hedged bonds," Akihito Ichikawa, general manager at Aioi Nissay Dowa's investment planning department, told Reuters in an interview.
"The cost of hedging dollar-denominated bonds remains high, so we have lifted the hedges on some and shifted to hedged euro-denominiated debt. As for unhedged investments, we increased dollar-denominated bonds in the first half."
Ichikawa said dollar-denominated debt still remained their mainstay foreign bond investment, which made up slightly less than a fifth of their overall portfolio as of March-end.
The insurer plans to trim some of their yen-denominated debt holdings in the second half. But it still sees yen bonds, which comprise more than half if its assets, as its core investment.
Ichiakwa said the 10-year Japanese government bond (JGB), which yielded 0.065 percent on Wednesday, offers poor returns, which has prompted the insurer to invest in higher yielding yen-denominated corporate debt.
Aioi Nissay said they will continue to trim their Japanese stock holdings in the second half as part of its longer-term plan to reduce exposure to these assets. Japanese stocks make up slightly less than 30 percent of its portfolio.
"The speed at which domestic stocks have risen recently caught us by surprise," Ichikawa said.
Japan's Nikkei has soared to a 21-year high this week, buoyed by a global rally in equities.
Looking ahead, Ichikawa said he was keeping an eye on U.S. politics under President Donald Trump as potential risk themes in the second half.
"The situation hasn't changed much over the past six months regarding U.S. politics. We will continue to watch how the financial markets react to Trump's attempts to implement policies like tax cuts," Ichikawa said.
"North Korea is an obvious concern, but the domestic markets' responses to related events have increasingly become short-lived, and we have not had to make any specific reactions."
Aioi Nissay Dowa is the non-life insurance arm of MS&AD Insurance Group Holdings Inc, Japan's biggest property and casualty insurance group. ($1 = 112.2200 yen) - Reuters
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