Japanese life insurers are steadily but cautiously increasing their exposure to foreign bonds, Fitch Ratings says.

Based on insurers’ third-quarter results, it notes the focus is mainly on short-duration bonds – about five years – to avoid excessive interest rate risks.

“However, this approach may lead to reinvestment risk,” Fitch’s Japan Director Teruki Morinaga said. “Several life insurance companies are deliberately increasing their currency risk-hedged positions due to a growing awareness that it is possible the yen may appreciate against the US dollar.”

The ratings agency says this is difficult to forecast given uncertainty on US President Donald Trump’s economic policies.

Japanese life insurers in general hedge currency risks only on the principal of foreign securities, Mr Morinaga says. Fitch sees a gradual accumulation of foreign currency bonds in portfolios, in the search for yield.

The proportion of foreign currency-denominated securities in the general accounts of traditional life insurers increased to 28% at December 31 from 26% at March 31.

Fitch notes Dai-ichi Life and Nippon Life are strengthening their in-house foreign credit research departments to allow more foreign credit investment opportunities.

But Japanese life insurers are still buying modest volumes of domestic bonds – especially long-term government bonds – to avoid a further widening of the duration mismatch between assets and liabilities. The proportion of domestic bonds in the general accounts of traditional Japanese life insurers had declined to 42% by December 31 from 44% at March 31.