Half-naked Japanese life insurers risk supercharging yen’s rally

Half-naked Japanese life insurers risk supercharging yen’s rally
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(Dec 1): A rush by Japan’s life insurers to protect themselves against a stronger yen may have the paradoxical effect of accelerating gains in the currency.

A Bloomberg analysis of the earnings reports of nine so-called lifers showed just 49.6% of their combined US$310 billion (RM1.37 trillion) of dollar assets was currency hedged at the end of September, down from 54.1% six months ago. That level of exposure — known as half-naked in the jargon — is the lowest in data going back to 2010 and market participants suggest that it will have to rise.

When investors like the lifers, a group which includes Nippon Life Insurance Co and Dai-ichi Life Insurance Co, raise their hedging levels, counterparts on the other side of the trade usually sell dollars for yen to minimise their own foreign-exchange risk. That puts upward pressure on the Japanese currency.

“Considering the prospects for US monetary policy, investors have no choice but think about the risk of a stronger yen,” said Kengo Suzuki, the chief market strategist of Mizuho Bank Ltd in Tokyo. “The hedge ratio is more likely to rise.”

The tide has already started to turn for the once-beleaguered yen as the US Federal Reserve signals a slower pace of rate hikes and falling oil prices ease downward pressures on Japan’s trade balance. They were the key factors that sent the yen tumbling almost 25% this year, but it has now appreciated about 10% since touching a 32-year low in late October.

Hedging remains expensive and the cost for Japanese investors to protect against moves in the yen has soared amid the currency’s slump. An estimate for a three-month hedge stood at close to 5% this week, near the highest since 2008.

Still, Mizuho’s Suzuki said hedging demand will return as investors reconsider buying overseas bonds and that points to further upside for the yen.

“New investments in foreign assets with hedges will reduce yen depreciation pressures, while hedges for existing positions will be yen-buying flows,” he said.