Japan's Taiju Life to shift away from FX-hedged foreign bonds

TOKYO (Reuters) - Japan's Taiju Life Insurance plans to reduce its holdings of currency-hedged foreign bonds in the six months to March while increasing those of domestic bonds, the company's investment planning official said on Thursday.

Japanese life insurers collectively hold about 370 trillion yen ($3.4 trillion) of assets under management and have been a big player in U.S. and European bond markets for many years as the Bank of Japan's aggressive easing has shrunk domestic bond yields.

Howwever, a recent drop in U.S. and European bond yields and elevated costs for dollar hedging have reduced the attraction of foreign bond investments.

Government bonds in the United States and Europe are no longer investable, so the firm is now mostly buying euro or dollar-denominated corporate and supranational bonds, said Yoshiki Nakamura, head of investment planning at Taiju Life.

While it aims to mainly buy bonds with a credit rating of single A or above, it is dabbling in triple B-rated debt for industry diversification, he added.

DOMESTIC BONDS

Taiju plans, meanwhile, to increase investment in domestic bonds, mainly focusing on long-term government debt such as 30-year bonds as well as subordinated debt issued by Japanese banks.

The company expects U.S. bond yields to fall further, with the U.S. Federal Reserve widely expected to impose additional cuts to interest rates in an effort to shore up the economy.

"As business sentiment among U.S. manufacturers has deteriorated due to the U.S-China trade war and global uncertainties, we expect U.S. growth to slow next year, though we believe a recession will be avoided," Nakamura said.

Taiju has cut its forecast for the U.S. 10-year Treasuries yield for end-March, the end of its current financial year, to between 1.1% and 1.9%, compared with 2.4% to 3% in its April projections.

Falling U.S. yields are likely to slow Taiju's sale of dollar-denominated annuity products and, therefore, its purchase of foreign bonds without currency hedging, Nakamura added.

The company expects to increase unhedged foreign bond holdings by 110 billion yen in the six months to March, about half the 210 billion yen increase in the same period a year earlier.

It has no plan to give up currency hedging on its foreign bonds holdings because of the risk that lower U.S. yields could lead to a weaker dollar against the yen, Nakamura said.

(Reporting by Hideyuki Sano; Editing by Chris Gallagher and David Goodman)

By Hideyuki Sano