Exclusive - Japan Post Insurance shifts to stocks, foreign bonds in bet on Abenomics

By Chikafumi Hodo

TOKYO (Reuters) - Japan Post Insurance is ramping up its investment in Japanese stocks and foreign bonds in a move that shows the government-controlled insurer is betting on the success of Prime Minister Shinzo Abe's policies in pursuit of higher returns, according to disclosures and a person with knowledge of the investment strategy.

The country's largest insurer, which has the equivalent of $846 billion in assets, is increasing its investment in Japanese stocks by an estimated 300-350 billion yen, or up to $3.5 billion (2.07 billion pounds), in the fiscal year that began in April, a rise of more than 50 percent from last year, according to the person, who asked not to be named because details of the developing portfolio shift have not been made public.

Japan Post Insurance, known as Kampo, has also earmarked the equivalent of $6.4 billion for new investment in overseas bonds, also up by more than 50 percent, according to a plan vetted and released by a government oversight panel for the insurer in March. That investment plan did not specify an allocation target for equities.

The move reflects the view that Abe's economic policies, dubbed 'Abenomics', including a continued programme of aggressive bond buying by the Bank of Japan, have brought Japan's capital markets to a tipping point and forced Japan's largest investors to take more risk to seek higher returns.

A spokesman for Japan Post Insurance said the insurer does not discuss the details of its investment strategy as a matter of policy.

Like Japan Post, the Government Pension Investment Fund (GPIF), the world's largest public pension, is investing more in stocks and higher-yielding alternatives to Japanese government bonds. Abe's ruling party said this week it would move to shake up management of the $1.26 trillion public pension by giving its board full-time staff and new powers to make portfolio decisions.

Taken together, the steps show how Abe's policies have mobilized billions of dollars of government-controlled investment to back a bet that Japan's economy is pulling out of deflation and toward a period of growth and improved corporate profitability.

"At a time when Japanese life insurers are conservative on Japanese stocks, it's good to see a big investor like Japan Post Insurance moving the other way," said Shun Maruyama, chief strategist at BNP Paribas Securities (Japan).

"Combined with GPIF raising its asset allocation for Japanese stocks, this will convey the message to foreign investors that domestic investors are starting to buy Japanese stocks."

LESS INTO JGBS

In effect, Japan's public funds are also contributing to Abenomics by buying Japanese stocks and selling the yen at a time when both are under pressure in the opposite directions.

The Nikkei stock average has been a barometer of confidence in Abe. The Nikkei is still up by about 40 percent since Abe’s election in December 2012, though the market peaked in May last year. The weaker yen has helped boost export earnings and was credited with igniting last year’s boom in stock prices.

The Nikkei was up just over 2 percent in afternoon trading on Thursday, including a spurt of just over half a percent after the Reuters report.

The developing portfolio shift at Japan Post Insurance is being offset by reduced investment in Japanese government bonds (JGBs). The insurer's holding of foreign bonds and Japanese equities are already at their highest level since the global financial crisis of 2008, data show.

Japan Post Holdings, which is headed for an initial public offering next year, holds the equivalent of $2.8 trillion in assets between its banking and insurance arms.

Stock in the holding company, which also has responsibility for Japan's mail delivery service, is held by the Ministry of Finance. It sits across the street in central Tokyo from the GPIF.

Japan Post Bank, which like its affiliated insurance arm is larger than its private rivals, has also been pulling back from JGBs and increasing foreign bond investment, data show. The banking unit increased foreign bond investment by 44 percent and cut its holding of Japanese government debt by 9 percent in the year to March. With 10-year Japanese government bond yields stuck near 0.6 percent, Japan Post Insurance has shifted to pull back on yen bond investments and move funds into "super-long" bonds with a maturity of 20 years or more, said the person with knowledge of its investment strategy.

Japan Post Insurance is targeting a return of at least 1.5 percent, the person said. Still, yields on 20-year Japanese government bonds are fluctuating below that target.

That has driven the fund to step up its investment in overseas bonds issued in U.S. dollars, British pounds and the euro. Following the lead of other large investors, the insurer has been keeping its currency exposure largely unhedged, betting on further yen depreciation, the person said.

The insurer generated an investment return of 1.67 percent in the fiscal year ended March. It has said it plans to invest 2.92 trillion yen in JGBs in the current year, down by 720 billion yen from last year's plan.

(Editing by Kevin Krolicki, Emi Emoto, William Mallard, Chang-Ran Kim and Ian Geoghegan)