Middle East situation adds to expectations of a rate hike in June, Japan's largest life insurance giant reduces its holdings of yen bonds to hedge risks.

Nippon Life Insurance Co., as Japan's largest life insurance company, plans to reduce its holdings of Japanese bonds in the current fiscal year and continue to shift from low-yield debt securities to high-yield bonds. Takeshi Ishida, executive officer of the company's Financial Investment Planning Department, stated at a press conference on Wednesday that if the Middle East conflict continues to pose a risk, "inflation and long-term interest rates will face upward pressure." He said, "We plan to reduce the overall investment portfolio by selling low-yield assets and extending the maturity of government bonds." In the fiscal year ending in March, the company had already reduced its holdings of domestic bonds by approximately 1.91 trillion yen (120 billion US dollars) and implemented portfolio adjustments of around 3.9 trillion yen replacing low-yield bonds with high-yield bonds. Ishida stated that the scale of reductions and replacements this year will be smaller than the previous fiscal year. It is understood that investment decisions by Japanese life insurance companies are closely monitored because these companies have the ability to impact global markets. Fukoku Mutual Life Insurance Co. plans to slow down its purchases of Japanese government bonds in the current fiscal year, while Dai-ichi Life Insurance Co. will maintain its overall holdings unchanged and replace low-yield yen-denominated bonds with high-yield bonds. Notably, amidst the interplay of the Bank of Japan's monetary policy direction and global geopolitical risks, the Japanese bond market is undergoing a profound restructuring. The latest market survey shows that due to the impact of the Middle East situation and observations of domestic economic data, the Bank of Japan is likely to keep its current policy interest rate unchanged at the upcoming meeting next week. However, this expectation of "standing pat" has not calmed the market, as June is viewed as a potential window for a new rate hike, increasing investors' urgency for a rate hike in the coming months. The recent disclosure by Nippon Life Insurance Co. of its plan to reduce its holdings of yen bonds is essentially a proactive defense against the moving of the rate hike window to June. As bond prices move inversely with market interest rates, once the Bank of Japan begins the process of hiking rates in the summer, long-term government bonds will face significant downward pressure on valuations. For life insurance giants holding large amounts of long-term assets, adjusting their positions during the policy vacuum period between April and June aims to avoid greater paper losses when the rate hike officially takes effect. By reducing the purchase size of yen bonds in advance and recapturing funds, institutional investors can re-enter the market at more attractive spreads when rates reach higher levels, achieving the renewal of their asset portfolios. Meanwhile, the uncertainty of the situation in the Middle East (Iran) has become a key external variable linking central bank decisions and institutional behavior. For the Bank of Japan, the energy price fluctuations caused by the Iran situation are a double-edged sword: they could either force the central bank to act sooner due to cost-push inflation, or impact global economic growth and make it wary. This complexity not only explains why the policy in April tended towards caution, but also confirms why Nippon Life Insurance lists "Iran uncertainty" as a core risk. Institutional investors are concerned that geopolitical conflicts could trigger secondary inflation, breach the current defense line of yields, and lead to an unexpected sell-off in the bond market. By the end of March, unrealized losses on Japanese government bonds held by Nippon Life Insurance Co. reached 5.73 trillion yen, a year-on-year surge of 2.13 trillion yen. Ishida explained that the company was able to offset the 1.35 trillion yen loss from selling yen bonds in the previous fiscal year by selling some equity investments for profit, minimizing the impact on overall profitability. With regard to rate expectations, the company believes that the Bank of Japan will hike rates twice in the current fiscal year, while the Federal Reserve will cut rates twice during the same period. Based on the assumption of stability in the Middle East situation, the Bank of Japan is expected to adopt a gradual rate hike path. The table below shows the company's specific forecasts: The Bank of Japan's policy stance next week and the reduction actions of major life insurance companies together form a prelude to a "storm approaching" in the Japanese bond market. The postponement of the rate hike window has not dissipated bearish sentiments in the market; instead, it has provided opportunities for market "ballast stones" like Nippon Life Insurance to adjust positions and diversify risks. As the crucial time point in June approaches, a combination of retreat by private buyers and tightening expectations by monetary authorities could lead to sustained pressure on Japanese government bond yields in the near future and face revaluation challenges.