We have written often on this site about the great distortion in financial markets caused by a long period of misguided monetary policy. Here the WSJ reports that the Japanese life insurance industry, managers of over $3 trillion in assets, is now looking to reach for yield in foreign government and corporate bonds because the Japanese Central Bank has mandated a zero percent interest rate on 10-year Japanese government bonds.
Japanese life insurers have future liabilities that need to be funded. A zero percent return isn’t going to cut it so the reach for return isn’t much of a choice in this case.
One of the greatest benefits of a free market system is that capital is allocated to the highest and best use resulting in stronger economic growth. When government takes over the role of the market in capital allocation (or intervenes heavily) the results are often poor.
Should it be that much of a mystery then, that slow growth in recent years has coincided with the most activist global central bank policy in history?
The WSJ has more of the details on the Japanese life insurance industry:
Japanese life insurers are being forced to take on greater corporate risk abroad because of the ultralow interest-rate environment engineered by the Bank of Japan, creating a new set of challenges for investment managers.
Japanese life insurers, which are closely watched around the globe because they control nearly ¥350 trillion ($3.3 trillion) in assets, traditionally invested mainly in yen-denominated bonds. More recently, they have expanded into foreign government bonds as yields at home have fallen to historic lows.
Now, the lack of safe foreign government bonds that offer sufficient return is prompting the insurers to take on the greater risks associated with financing companies abroad.
“We are investing in assets that have some spread, mainly foreign corporate bonds such as U.S. ones,” Iwao Matsumoto, general manager for investment planning at Sumitomo Life Insurance Co., said Thursday. “Investments in Treasurys don’t generate returns.”
Mr. Matsumoto said Sumitomo Life was buying billions of dollars of foreign corporate bonds each year, hedged against the yen’s strength, as part of its midterm strategy. Sumitomo Life said it boosted its holdings of foreign bonds by ¥1 trillion in its fiscal first half ended in September.
Jeremy Jones, CFA
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