Heightened volatility and low liquidity are deterring Japanese life insurers from buying more of the nation’s sovereign bonds, increasing upward pressure on yields.

The caution from this key group of investors contrasts with expectations that they would step up purchases this year after interest rates shifted higher with the Bank of Japan normalizing monetary policy. It also runs counter to the increased appetite of foreign investors, who have snapped up a record amount of Japanese government bonds recently.

Among nine life insurers that have disclosed investment plans for the fiscal year that began April 1, only four mid-sized companies plan to raise their holdings of yen-denominated bonds. The largest members of the sector are mostly limiting purchases to replace JGBs as they mature. Dai-Ichi Life Insurance Co. indicated it would maintain holdings at current levels, while Nippon Life Insurance Co., Meiji Yasuda Life Insurance Co. and Japan Post Insurance Co. flagged reductions.

While the combination of a rising yen and higher yields in Japan offer improved returns and a degree of safety to some global investors amid turmoil in world markets, many domestic institutions are awaiting calmer conditions and more clarity on the BOJ’s rate-hike path.

“Many market participants had hoped the insurers would fill the vacuum created by the BOJ’s retreat as these institutions can absorb huge swaths of bonds and help anchor yields,” said Shoki Omori, strategist at Mizuho Securities Co. in Tokyo. “This shift signals that the market’s usual ‘safety net’ might not be so automatic anymore, adding a splash of uncertainty for everyone navigating Japan’s bond market.”

Even before the investment plans revealed in recent weeks, Japanese life insurers had trimmed JGB holdings by ¥1.35 trillion in the three months through March, the third-largest sum on record and the most since 2017, according to Bloomberg analysis of data from the BOJ and Japan Securities Dealers Association.

With combined invested assets of about ¥390 trillion, investment decisions by Japan’s life insurers are closely watched by global investors as they can move markets.

The yield on the 30-year JGB favored by life insurers has surged from close to zero ahead of the Covid outbreak in 2019 to reach 2.845% this month. Meanwhile, Japan’s benchmark 10-year yield has gone from around zero before the pandemic to more than 1.5% this month, compared with a move in the equivalent US Treasury from near 2% to about 4.5%.

Investors in JGBs are contending with markets being whipsawed by US President Donald Trump’s shifting stance on tariff levels, which is also making it more difficult to project pace of inflation in Japan and further BOJ rate hikes. 

“When the market is moving rapidly, taking action could exacerbate price fluctuations,” said Hiroyuki Nomura, operating officer and senior general manager of Japan Post Insurance Co.’s investment planning department. “It’s difficult to act when liquidity is low, so we try to trade when the market is stable.”

Japan’s biggest life insurer, Nippon Life, said that while current yield levels are appealing, it plans to reduce its yen-bond holdings this fiscal year due to low liquidity and heightened volatility. Meiji Yasuda aims to decrease its holdings of the nation’s bonds for the second consecutive year, while boosting purchases of foreign bonds and stocks.

To be sure, some life insurers are in agreement on JGBs with global funds, who are estimated to have boosted their holdings by a record ¥6.4 trillion last quarter as heightened risk aversion drew foreign investors to the haven.

Fukoku Mutual Life Insurance Co., Taiyo Life Insurance Co., Taiju Life Insurance Co. and Daido Life Insurance Co. plan to boost their yen bond holdings after their yields surged.

For insurers, JGBs “are probably worthwhile revisiting especially in this higher volatility environment where it is riskier to invest overseas,” said Naomi Fink, chief global strategist at Nikko Asset Management.

What Bloomberg strategists say…

“The yen’s appreciation will emerge as a stabilizing force for Japanese government bonds, reinforcing their appeal as inflationary pressures ease and a global bid for haven assets dominates at a time of heightened volatility.”

“Japan, the third-largest bond market globally after the US and China, is well-positioned to absorb haven flows. Unlike China, Japan offers ready access.”

— Mary Nicola, Markets Live strategist. Read more on MLIV.

Uncertainty surrounding Japan’s fiscal policy is also contributing to volatility in super-long bonds, after Japanese Prime Minister Shigeru Ishiba said he would create an emergency economic package to help industries cope with the impact from US tariffs.

“Japan life insurers’ have a general preference for JGBs, but the timing of their entry will largely be affected by market volatility due to US tariffs,” Bloomberg Intelligence analyst Steven Lam wrote. Life insurers “are likely to buy more JGBs when yields stabilize after receiving clarity on the BOJ’s rate hike path and on fiscal stimulus.”

With assistance from Masaki Kondo.

This article was generated from an automated news agency feed without modifications to text.