Faced with BOJ negative rates, money managers enter new era


BlackRock Inc.’s Jason Miller has fielded more calls from Japanese investors in the past few weeks than ever in recent memory. Among the main concern for clients: How can they safeguard returns in a new era of below-zero rates?

Miller, who heads BlackRock’s exchange-traded fund unit in Japan, is not alone in grappling with a new reality for the nation’s money managers. Diam Co., which manages $144 billion, said it has been conducting daily internal meetings since the Bank of Japan made its announcement Jan. 29 to discuss new ways to eke out returns. Japan Post Insurance Co., the nation’s largest insurer, said it may seek to replace low-yielding Japanese bonds with foreign holdings.

The BOJ’s surprise decision to move to a negative-rate policy has roiled the nation’s $14.1 billion money-market fund industry, with the 11 main firms in the business halting new investments into their funds. Managers with the flexibility to invest across asset classes may accelerate a shift away from domestic government bonds with yields on 10-year debt hovering near record lows below zero.

“I would expect the negative-rate decision to increase the longer-term trend that has been apparent around a shift by fixed income investors out of JGBs,” Miller said, referring to the Japanese government bonds.

Investment managers have halved the proportion of assets they hold in domestic bonds to 15 percent over the past five years, according to data as of Sept. 30 from the Japan Investment Advisers Association.

The yield on the benchmark 10-year Japanese government bond closed unchanged at minus 0.06 on Thursday.

Investors around the world have had to seek novel ways to boost returns since the European Central Bank enforced negative interest rates in June 2014, and countries such as Sweden, Switzerland and Denmark have also cut rates below zero to jump-start growth. For money managers seeking to balance high returns with less risk, it has been a struggle to find investments amid slowing global growth, rising market volatility and declining yields for bonds.

Diam is considering buying foreign debt, though negative rates in other markets around the world and currency risks are posing a challenge, President and Chief Executive Officer Yasumasa Nishi said in an interview.

“We are debating whether we should start investing in foreign debt with currency hedges,” he said. “That would leave us the U.S. market because there’s negative rates in Europe as well. Our choice becomes limited.”

At BlackRock’s Japan unit, some of the products investors are seeking to boost returns include real estate investment trusts and global credit products, said Miller. BlackRock is also noticing a shift into U.S. Treasuries, he said.

“As a firm, we are thinking about near-term and longer-term solutions,” Miller said. “It’s been a very active two weeks for us. It’s creating a significant amount of dialogue across a broad range of investors.”

Mizuho Financial Group Inc. plans to boost staff for underwriting debt as the negative rates policy drives investors to seek riskier notes such as capital-boosting securities. While companies may favor loans over bonds after the BOJ penalized banks for holding cash, sovereign yields below zero will force investors to consider new fixed-income assets, according to Yutaka Fukushi, the head of global capital markets at Mizuho Securities Co.

Nomura Asset Management Co. and Daiwa Asset Management Co. are among 11 managers of money funds that have stopped accepting investments in a move that spells the end to the industry in its current form. Money reserve funds, which are pools used by brokerages to park their cash, are also under pressure. Japan Securities Dealers Association Chairman Kazutoshi Inano said his group has asked the Bank of Japan to exclude money reserved funds from the negative rate, and has not yet received any response.

Among the most vulnerable investors to negative rates are the Japanese insurers that rely on their Japanese government bond holdings to meet insurance payouts. The Life Insurance Association of Japan, a group consisting of 41 insurers, said that negative interest rates make it difficult for the nation’s insurers to manage their assets and products. About half of the insurers’ $2.67 trillion in assets is invested in Japanese government bonds, according to the association.

Ensuring the payout “has been our mission and at the current level of interest rates, it would be difficult to manage assets that focus on Japanese government bonds,” said Yoshinobu Tsutsui, chairman of the Life Insurance Association of Japan and president of Nippon Life Insurance Co., Japan’s biggest life insurer. “It’s unavoidable that we will see a shift to foreign debt.”

Japan Post Insurance plans to lift its allocation to stocks and foreign debt to 10 percent of the portfolio by March 2018 from 6.4 percent as of December, President Masami Ishii said in an interview.

With stock markets around the world plunging this year because of concerns about slowing growth and elevated volatility, equities might not be the most obvious choice for risk-averse investors. Japan’s Topix index has tumbled 9.8 percent since the BOJ decision on Jan. 29, compared with a 0.3 percent decline for MSCI World Index.

Still, to Nicholas Smith, a strategist at CLSA Ltd. in Tokyo, the declines have made Japan’s stock markets more attractive. He said the probability of an increase in the nation’s equities is a lot higher at these valuation levels. Topix stocks are trading near the lowest price-to-earnings ratios since October 2014.

“If you are a fund manager and you have a majority of money in bonds and very little in equities, then run, don’t walk,” he said.

“You need to get out of the bonds and start moving into equities.”