By Ritsuko Shimizu
TOKYO (Reuters) – Japan Post Bank and Japan Post Insurance, which are among Japan’s largest financial firms, said their portfolios and hedging policies will not change drastically in response to the country’s first rise in interest rates in more than a decade.
Japan Post Insurance, which is a part of the Japan Post Holdings conglomerate, said the Bank of Japan’s radical policy pivot this week to end negative rates did not mean interest rates would rise rapidly.
Rate rises in Japan “will lead to a decline in the market value of bond holdings” but the firm would seek to increase yield by replacing holdings with bonds whose yields exceed the cost of liabilities, Japan Post Insurance said in comments emailed to Reuters.
“We expect hedging costs to remain high as the Bank of Japan is unlikely to raise interest rates continuously and foreign central banks are unlikely to cut interest rates rapidly,” the company added.
The impact on the bottom line will be limited, it said, as about 90% of its domestic bonds were “in held-to-maturity and policy-reserve-matching bonds, which are not marked-to-market for accounting purposes”.
The BOJ’s widely anticipated end to its unorthodox yield curve control policy has put the spotlight on the $2.4 trillion of foreign debt that Japan’s life insurance companies, pension funds, banks and trust firms collectively hold.
Most analysts suspect these holdings, which earn yen investors upwards of 5%, will stay offshore and unaffected by the slight increase in yen rates. For banks and life insurance firms, which hedge the bulk of their foreign bond holdings, the shift in policy does not materially lower hedging costs much either.
Japan Post Bank, a behemoth postal savings firm, had 83 trillion yen ($548 billion) of long-term foreign securities including debt and investment trusts at the end of December.
It said a rise in short-term rates could increase earnings and a rise in long-term rates could improve future earnings growth, albeit with a temporary hit to valuations on current Japanese government bond holdings.
“We believe that this can be adequately managed due to the fact that we have a large amount of capital and have been conducting thorough risk management with an eye to rising yen interest rates,” the bank said.
“We do not expect to make any major changes in our investment strategy in foreign bonds.”
($1 = 151.4500 yen)
(Writing by Vidya Ranganathan; Editing by Jamie Freed)
Comments