(Bloomberg) -- Japanese life insurers dialed back their protection against a rebounding yen to a decade low and may cut those positions further in coming months.

Nine of the nation’s biggest life insurers had 47% of their foreign securities covered with derivatives that help shield them from losses in case the yen strengthens, according to the companies’ earnings reports as of March 31 compiled by Bloomberg. That’s the lowest since September 2011 and compares with a high of 63% in March 2020. 

When insurers aren’t hedging, it likely means they are expecting the yen to either weaken further, or even if it strengthens, it won’t rise so much that it will cut into foreign investment gains in Japanese currency terms. The yen has weakened 1.3% against the dollar in the past month, the worst performer among Group-of-10 currencies.

“Currency hedge ratios will maintain their declining trend with yield differentials unlikely to narrow substantially,” said Tsutomu Soma, a bond and currency trader at Monex Inc. in Tokyo. “From that perspective, I can’t see any rise in yen appreciation pressure.”

Japan’s life insurers held more than ¥300 trillion ($1.9 trillion) in securities in the fiscal year ended March 2023, government data show. Four of the firms are among the world’s 20 biggest life insurers, led by Nippon Life Insurance Co. in third place globally, according to S&P Global Market Intelligence.

Concern is increasing that the weaker yen isn’t only due to yawning yield differentials between Japan and its major peers. There are also elevated capital outflows through direct investment as the nation’s economic competitiveness falters and prompts businesses to try their luck overseas.

The outlook for interest rates is also playing into this. Some central banks, including those in the euro area, Canada and Switzerland, have started to lower key borrowing costs, while the Bank of Japan has sought to normalize monetary policy further after dismantling yield curve control and negative interest rates in March. 

Still, a wide difference in short-term interest rates has kept currency protection costs at prohibitive levels, making it a loss-making proposition to buy hedged foreign bonds. Ten-year Treasuries yield minus 1.2% for Japanese investors with protection against a drop in the dollar, compared with 4.22% without.

There’s little appetite among most major life insurers for hedged overseas bonds, with firms holding on to them for now or reducing them further, based on their investment plans for the fiscal year ending March 2025. Some, such as Meiji Yasuda Life Insurance Co. and Taiju Life Insurance Co., are planning to increase holdings of foreign bonds without currency hedging.

“Life insurers may just keep their unhedged foreign bond holdings unless there is a significant drop in the dollar against the yen,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo.

(Adds details on the size of Japanese insurers in the fifth paragraph.)

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