Japan’s biggest life insurers have ramped up their use of longer-dated currency hedges to a record to escape sky-high costs, suggesting they’re buying more riskier securities that benefit from protection.
Currency swaps protected more than 11% of overseas securities owned at the end of the fiscal year to March, according to earnings reports from nine of the largest life insurance companies analyzed by Bloomberg. These contracts tend to last over the expected lifetime of an investment, making them especially useful for those which carry more risk.
The increased adoption of less widely-used longer-maturity derivatives underscores the challenge that Japanese investors face as sky high short-term hedging costs erode returns from foreign securities. They also reflect how they have dialed up their risk tolerance to deal with the constraints of a domestic bond market crippled by Bank of Japan’s yield-control policy.