Nippon Life Insurance has reduced its hedging against the appreciation of the yen on its overseas assets to the lowest level in 14 years, suggesting that market expectations of a sustained rise in the yen have weakened.
According to an analysis by Bloomberg News of the earnings reports of Japan’s nine largest life insurers, the collective exposure of these companies to bullish yen bets linked to overseas investment holdings dropped to 44.4% by the end of the fiscal year in March from 45.2% six months earlier.
Although the unpredictable policy-making of the Trump administration has caused fluctuations in the foreign exchange market, this has not been enough to prevent the volume of yen hedging from declining for three consecutive years. The policy interest rate of the Bank of Japan is still 3 percentage points lower than the country’s inflation rate, and the next possible interest rate hike is expected to be further postponed.
Ayako, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo, said that the continuous decline in hedging scale indicates that “life insurance companies believe the possibility of the yen strengthening as it did in the past has decreased, and they think it is necessary to hold unhedged overseas bonds to maintain foreign exchange risk exposure. The real interest rate of the yen is just too low.”
If the depreciation of foreign currencies offsets the capital and income gains from overseas assets, unhedged positions may result in losses. This could prompt life insurance companies to rush into currency hedging, thereby exacerbating the plunge of foreign currencies against the Japanese yen.
The gauge of the yen’s strength against the currencies of Japan’s major trading partners rose to a six-month high in March as the dollar weakened broadly. But the yen failed to hold onto its gains and fell 1.6% in the first half of the fiscal year as the Bank of Japan included trade policy in its list of risks to the economic and inflation outlook.
As the central bank has postponed the expected time to achieve the inflation target this month, the possibility of raising interest rates has further decreased.
Overnight index swaps indicate a 72% chance of a 25 basis point rate hike by the central bank before the end of the year. At the end of January, swap prices had priced in a 27% chance of a 50 basis point rate hike for the whole year.
Meanwhile, swap data suggest that there is a 50% chance that the Federal Reserve will resume cutting interest rates as early as September. A reduction in US interest rates usually helps lower the cost of hedging the dollar for Japanese investors, as these costs are mainly determined by the interest rate differential between the two countries.
“Therefore, ‘I think the demand for currency hedging will rebound in the future,’ said Tsuyoshi Ueno, an executive researcher at NLI Research Institute in Tokyo.”
Data from Japan’s Ministry of Finance shows that in the six months ending March 31, life insurance companies net sold foreign bonds worth 756 billion yen, marking the seventh consecutive fiscal year that they have sold these bonds in the first half. In the six months ending September 30, life insurance companies net sold 21.2 billion yen worth of overseas stocks, while in the previous year they had bought 1.06 trillion yen worth.
Technical analysis:
Gold: This week, gold is once again facing the period of the Chinese long holiday. Here, we suggest being cautious of the risk of manipulative selling pressure on Friday evening. The market trend can be referred to the trends during the Qingming Festival and Labor Day holidays. However, if there is a sell-off, we should pay attention to the new demand zone buy signal that may emerge after Monday. For detailed positions, please consult the plugin.
(Gold 15-minute chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the chart, please contact V: Hana-fgfg and note “666” in the message.
The Nasdaq: The price movement yesterday continued to align with the characteristics of the yellow alert from our plugin. After refreshing a new high, it turned around and fell back. The positive earnings report from Nvidia was not enough to counterbalance the CEO’s plan to reduce holdings and the appellate court’s temporary retention of Trump’s tariff policy. We suggest observing mainly within the day. If there is a signal of a liquidity drop after a rebound, then you can continue to participate in short selling. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the chart, please contact V: Hana-fgfg and note “666” in the message.
Crude oil: The price has dropped significantly. Whether the tariff will be upheld or rejected by the appellate court has created considerable uncertainty in the short term for the market. The crude oil price may fluctuate up and down within the day, so we suggest waiting and seeing for a day. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the picture, please contact V: Hana-fgfg and note “666” in the message.
Today’s key financial data and events to focus on:
20:30 Canadian Q1 GDP
April Personal Consumption Expenditures Price Index at 20:30
22:00 The final reading of the University of Michigan’s Consumer Sentiment Index for May in the United States
