TD On The Outlook For Japanese Life Insurer Investment Flows

TD Securities note that “Japanese lifers have been mostly sellers of foreign bonds since 2020. FY23/24 Fiscal plans suggest that the appetite for foreign bonds is likely to remain low this year as well. This makes sense given punitive FX hedging costs. Unhedged buying could be tactical driven by the level of the JPY (which was not the case last year). A stronger JPY allows more unhedged buying, but the outlook on FX will be key. Interestingly, all lifer plans expect a revised YCC as early as June, in line with our view. This makes them keener on increasing JGB exposure especially in the long end. Also, we note that they generally seem more supportive for equities/credit.”

• They “still believe that with central banks ready to press the pause button, Japanese investors are likely to increase their exposure to foreign bonds. The overall flow will be a function of how quickly the BoJ is ready to let go of YCC. But cross-market correlations could put a cap on long JGB yields. This in particular holds as we expect the US economy to enter a recession by the end of the year and force the Fed to cut rates. We forecast the U.S. 10-Year to reach 2.75% and 10-Year Bunds to reach 2.00% by end 2023.”