October 13, 2016 / 6:31 AM / 9 months ago

INTERVIEW-Japan's Fukoku to stick to 'open foreign bonds' in H2 on rising hedging costs

3 Min Read

TOKYO, Oct 13 (Reuters) - Fukoku Mutual Life Insurance will continue to invest in foreign bonds without currency hedging in the second half of the current fiscal year due to rising dollar hedging costs, a senior company official said, just as it did in the first half.

Hedging dollar-denominated investments has become more expensive as U.S. and Japanese monetary policies move in opposite directions, increasing the cost of compensating for the expected divergence in returns.

With Japanese government bond yields falling to record lows under the Bank of Japan's negative interest rate policy, Japanese investors have turned to foreign assets in search of higher yields, but the strong demand has come with increased currency hedging costs.

Fukoku bought foreign bonds without currency hedging, or "open foreign bonds" such as U.S. Treasuries, worth 210 billion yen ($2.04 billion) in the first half ended September, Takehiko Watabe, general manager of investment planning, told Reuters on Thursday.

This took the insurer's total foreign bond investment to 270 billion yen in the first half, Watabe said, adding it planned to buy an additional 20 billion yen worth open foreign bonds in the second half.

Fukoku, which had 6.5 trillion yen in total assets at the end of the previous fiscal year, invested 60 billion yen worth hedged foreign bonds in the first half, compared with the 160 billion yen it planned to invest in May.

"When we made our investment plans in May, hedging costs were already rising, but they rose further in the summer," Watabe said.

"An increase in the cost of hedging diminished the appeal of hedged foreign debt, so we shifted to open foreign debt."

The value of the insurer's hedged foreign bonds has shrunk as the yen strengthened, he said. But the insurer made profits from the previous year's investment in hedged foreign debt, which was allocated to open foreign bonds cheaply this year.

Watabe also said Fukoku aimed to buy more equities than it planned initially, in a move to net higher yields. It planned to buy 75 billion yen worth of both Japanese and overseas equities, up from the 65 billion yen planned earlier, he said.

"We plan to add additional 10 billion yen in Japanese exchange traded funds as hopes that the BOJ will buy ETFs supports the market," Watabe said, adding that Fukoku refrained from investing in JGBs due to the record low yields on Japanese government bonds.

The BOJ surprised markets by introducing measures to control the yield curve in its policy meeting last month and said it would aim to keep the 10-year government bond yields at around zero percent.

But the 10-year Japanese government bond yield has been in negative territory. On Thursday, it stood at minus 0.060 percent.

The U.S. benchmark 10-year Treasury yield was last at 1.7446 percent, and Watabe expects it to trade between 1.3-1.9 percent in the second half of the fiscal year.

$1 = 102.9000 yen Reporting by Ayai Tomisawa; Editing by Biju Dwarakanath

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