(Bloomberg) -- Fukoku Mutual Life Insurance Co. expects the Bank of Japan to scrap the world’s last negative interest rate in April and has “no need” to buy domestic sovereign bonds until the anticipated move pushes yields higher. 

Fukoku’s view is similar to that of Meiji Yasuda Life Insurance Co. and adds to concern about demand for longer-maturity bonds. The government plans to auction 20-year securities on Thursday and 40-year debt on Jan. 25. Yields have declined across the curve, facing pressure from overseas markets amid speculation that the Federal Reserve will start cutting its benchmark interest rate this year. 

Japanese life insurers are the main buyers of bonds due in more than 10 years and typically increase purchases toward the end of the fiscal year. They are holding off as the earthquake that struck Ishikawa Prefecture on Jan. 1 reduced the likelihood that the BOJ will end negative rates at its meeting next week. Swap markets price in about a 13% chance of a rate increase at its meeting in March compared with about 70% a month ago. 

Meiji Yasuda Will Avoid Japan Sovereign Bonds Until Yields Rise

“We don’t buy them as it’s not necessary to do so before an increase in yields,” said Yoshiyuki Suzuki, executive officer and head of the investment planning department at the insurance company, which has total assets of about $49 billion. Should the market price in a potential removal of negative rates again, “it is possible to see the 10-year yield rising toward 1%,” he said in an interview on Tuesday. 

The company said in October that after buying Japanese government bonds in the first half of fiscal 2023, it considered halting further purchases of local sovereign debt and overseas bonds during the second half. 

Looking at wage data, inflation and economic conditions, “we are not in an environment where the policy rate would be kept at zero and so, the BOJ is likely to let the rate rise, albeit at a very gradual pace and over the long-term,” Suzuki said. 

BOJ Governor Kazuo Ueda “will probably avoid a surprise and let the market price in their move, putting an upward pressure on local yields,” said Suzuki. He expects the BOJ to boost the policy rate above zero when it scraps the negative rate policy. 

Market players believe that life insurers have increased holdings of domestic super-long bonds to comply with upcoming regulations, which has been one of the factors supporting market demand. Meiji Yasuda said life insurers are fairly well-positioned in complying with regulations. The company’s comments indicate demand from life insurers is limited.

Fukoku has a different approach — increasing its net assets to cover its liabilities including policies rather than boosting holdings of debt. Fukoku’s capital adequacy ratio stood above 13% at end-September compared with 7.3% at end-March 2013, before the introduction of unconventional monetary easing by the central bank in April of that year. 

The yield on the benchmark 30-year bond has declined to 1.59% on Tuesday from around 1.9% in November, when it reached the highest in a decade. 

--With assistance from Masaki Kondo.

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