Taiyo Life to keep bulk of foreign bond holdings currency-hedged

By Shinichi Saoshiro and Takefumi Ito

TOKYO (Reuters) - Japan's Taiyo Life Insurance increased currency-hedged foreign bond holdings in the first half of the fiscal year through March 2017 and plans to keep currency exposure limited in the second half, a senior official told Reuters on Wednesday.

Taiyo Life is a unit of T&D Holdings (8795.T), which has about 7.3 trillion yen (58 billion pounds) in assets.

Japan's life insurers have traditionally stuck to Japanese government bonds, but they have diversified their portfolios over the past several years as much of the domestic yield curve has fallen below zero percent due to the central bank's easing.

"We increased our hedge ratio to around 80 percent in the first half, from 70 percent at the end of last fiscal year," Takeshi Negama, general manager at Taiyo Life's investment planning department, said in an interview.

"Although the yen is not that strong at the moment, we reduced our currency exposure on expectations that the currency would appreciate on events like Brexit," Negama said.

He added that over half of the increase in foreign bond investments during the first half was in dollar-denominated instruments.

Currency-hedging protects an investor's foreign bond investments from potentially unfavourable forex fluctuations, but it is the more expensive than holding unhedged bonds.

For the second half of the fiscal year, Taiyo Life plans to slightly increase their foreign bond holdings.

The insurer aims to keep its currency hedge ratio unchanged in the second half, although it plans to increase currency exposure and expand unhedged foreign bond investment if the yen strengthens.

Taiyo Life expects dollar/yen to move between 95 and 110 for the rest of the fiscal year.

"The shift from globalism to nationalism is an underlying geopolitical risk. Protectionism, which we did not consider a factor at the start of the fiscal year, is now also a theme. We think the yen can gain on these factors," Negama said.

Taiyo Life said it increased yen bond holdings a touch in the first half and plans to continue expanding them slightly in the second half.

"We increased our yen bond holdings on two factors. Brexit made the situation more opaque and increased risk aversion," Negama said.

"The potential for losing earnings from bonds also decreased after the Bank of Japan changed policy to target the yield curve and reduced the risk of yields rising."

The central bank adopted a yield curve control strategy in September in a bid to control the benchmark yield.

Taiyo Life expects the benchmark 10-year JGB yield to move between minus 0.2 percent and 0.1 percent in the second half. The yield was at minus 0.07 percent on Wednesday.

The insurer said it will keep its domestic stock holdings steady in the second half, just as it had done in the first half.

(Editing by Simon Cameron-Moore)