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With respect to foreign bonds investments, the shared concern is high hedging costs of late (refer 1st chart). Yet, overall Japanese lifers remain keen to seek investment opportunities outside Japan given the domestic low yield environment. Some expressed willingness to shift from US bonds to European bonds with lower hedging costs; the shift has already been observed in portfolio data since late last year (refer 2nd chart).
Almost all remain keen to increase foreign bonds investments with no FX hedge in FY2018. On average, the bottom of their expected range of USDJPY is low-100 while the average higher end is high-117 (refer 3rd chart). Some mentioned 105 as a critical level for USDJPY and they might increase exposure to FX once the pair falls below the level.
In addition, this would support our view that USDJPY will remain in a range between 103 and 115 as the bottom would be supported by the possible outward flows. Separately, the average higher end of expected UST 10 year yields is 3.3-3.4%. If the UST yields continue to rise and approach the higher end level, or even just stay as high as now, it might encourage outward investments in foreign bonds.
While their investment strategy heavily depends on market environments and could alter over time, if they increase their FX exposure as they wish, it will possibly cause a significant amount of JPY selling. According to the BoJ and MoF data, Japanese lifers recently own roughly ¥83trn foreign assets. While the hedging ratio is likely about 70% now, if they lower 5% by unwinding hedging position, it would cause ¥4trn JPY selling.
Currency Strength Index: FxWirePro's hourly USD spot index has shown -4 (which is absolutely neutral), while hourly JPY spot index was at 44 (bullish) while articulating at 06:58 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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