Dai-ichi Life Forecasts Decrease in Japanese Bond Volatility

Japan's largest listed life insurance company, Dai-ichi Life Holdings, has forecasted that the volatility in Japanese government bonds, which has led to significant paper losses for insurance companies, is expected to decrease. The company's chief executive officer, Tetsuya Kikuta, attributed this expected reduction in volatility to the lack of economic fundamentals supporting the recent surge in bond yields.

Kikuta noted that new buyers are entering the Japanese government bond market, which is exacerbating market volatility. Last week, the 30-year Japanese government bond yield reached a record high, eroding the value of existing bonds in insurance companies' investment portfolios. As of March 31, Dai-ichi Life's unrealized losses on Japanese government bonds amounted to approximately 2 trillion yen (14 billion USD).

The decline in the 78 trillion yen Japanese government bond market has affected multiple companies, including Nippon Life Insurance and the Japan Finance Corporation. The Bank of Japan's reduction in holdings amid rising inflation has triggered a sell-off in long-term bonds. This surge in yields represents a stark reversal for these companies, which were previously struggling with low domestic investment returns and seeking more attractive overseas assets.

“The number of long-term Japanese government bond investors is very limited, and they are being replaced by short-term investors,” Kikuta stated. “This has increased the volatility in the Japanese government bond market.”

Kikuta also mentioned that while liquidity issues could cause yields to rise further in the short term, the Japanese government bond market may stabilize by the end of the year. The swap rates are approximately 60-125 basis points lower than the yields on comparable Japanese government bonds.

“Japan's potential economic growth rate is less than 1%, and inflation will only affect short-term interest rates. Therefore, fundamentally, I do not believe that long-term interest rates should remain at their current levels,” Kikuta said. “They are just temporarily overshooting, partly due to supply and demand dynamics.”

Japanese ultra-long-term bond yields have declined, and the market is set to test investor demand with a bond auction scheduled for Wednesday. The previous Japanese government bond auction results sparked global market panic. On Tuesday, yields on 40-year and 30-year Japanese government bonds fell by 10 basis points in the Tokyo market, continuing a recent downward trend after a significant rise the previous week.

As of March 31, Dai-ichi Life's domestic insurance subsidiary held 16.6 trillion yen in Japanese government bonds and municipal bonds, with more than half having maturities of over 20 years. This substantial holding underscores the company's exposure to the fluctuations in the Japanese government bond market and its strategic focus on long-term investments.