Japanese Lifers Bound To Increase Their Exposure In Foreign Assets

The Japanese life insurance companies (lifers) have continued to increase their exposure to foreign securities, at the exp ense of Japanese bonds. Since the launch of Abenomics, the allocation to foreign securities has risen close to a record high level of 23.3% in the second quarter of 20 18. The preference toward foreign assets is anticipated to continue due to increasing monetary policy divergence between the FED and the BoJ . The BoJ will implement the quantitative easing mode unti l the 2% inflation target is reached and its forward guidance to keep JGB yields low , below the lifers ’ guaranteed yield, which is putting additional pressure on their profit margin. On the back of these developments, the partial decoupling of global bond yields is raising the attractiveness of foreign assets for Japanese lifers. Despite the recent rising USD funding cost with expanding cross-currency (XCCY) swap spread for the JPY, the preference towards the foreign portfolio is likely to continue. When the funding cost surged in 2016 during the US Money Market Fund reform, lifers actually ended up increasing their exposure to foreign assets following an initial small decline. While the uncertainty on the USD funding cost is the key risk to our scenario , Japanese lifers are expected to increase their allocation to foreign securities to protect their margins, with a current ly higher US Treasury yield.