• Bloomberg


The U.S. Federal Reserve’s pivot from steady monetary tightening has forced a Japanese insurer to look at a pivot of its own.

Facing rock-bottom yields in its home market, Fukoku Mutual Life Insurance Co. had ramped up its overseas investments to about 30 percent of its total.

The majority of that wasn’t hedged for currency risk — the thinking was that rising U.S. rates would put downward pressure on the yen. But with the Fed’s dovish shift, that tactic’s not looking so hot, and Fukoku’s now set to boost its hedging.

“This is the year to brace for yen appreciation as the No. 1 risk,” said Takehiko Watabe, executive officer at Fukoku, which has ¥6.6 trillion ($60 billion) in assets.

“We are seeing a turning point in the yen’s weakening trend,” Watabe said in an interview Feb. 20. “Our challenge into the next fiscal year is how to keep hedging costs contained.”

He’s skeptical the yen can stay around the 110 per dollar — or weaker — level it’s been trading at for the past couple of weeks. He sees it mostly trading in a 105 to 110 range this year.

The yen is down about 1 percent since the start of the year thanks to diminishing demand for the currency as a haven amid a recovery in global stocks.

The exchange rate is particularly sensitive for Fukoku, with its ratio of overseas holdings exceeding the shares of larger rivals. Nippon Life Insurance Co. has around 20 percent of its assets abroad, about the same as Meiji Yasuda Life Insurance Co.

Fukoku has kept its foreign exchange hedging ratio below 50 percent but plans to gradually raise that this year, using currency forwards or options, Watabe said. For current holdings, it’s looking to lock in forwards while the dollar is hovering around ¥110, he added.

The change in hedging practices will in turn affect the insurer’s allocations. Given high hedging costs, U.S. Treasuries and corporate debt aren’t attractive, Watabe said. So Fukoku is turning to longer-maturity sovereign and regional European bonds, where its investments had been limited.

Assets with a 1 percent return after hedging may not be as rewarding as 3 percent bonds without a hedge, “but we can manage to stay profitable for one to two years even with this strategy,” he said.

On the home front, Japanese government bonds aren’t appealing at current yields, and Fukoku will be avoiding them at least through the end of March, according to Watabe. Stocks could be more interesting, particularly if the Nikkei 225 stock average drops below 20,000. (It closed at 21,528.23 on Monday.)

“Looking for individual stocks that seem oversold selectively is more justifiable for our risk-taking,” Watabe said. That could be “a better short-term strategy than taking currency risk over the next year or so,” he said.

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