By Hideyuki Sano
TOKYO (Reuters) - Japan's craze for overseas insurance products, driven by a need for better yield than the near-zero ones at home, has been a long-standing headwind for the yen as domestic insurers bought foreign bonds.
But demand is likely to cool as the authorities clamp down on aggressive marketing for these foreign-currency denominated insurance products, which will curb their sales, and hence the selling of yen from Japan.
That is bad news for Japanese policymakers who are concerned that a stronger yen hurts export competitiveness, especially as the currency has strengthened 2.7% against the dollar so far this month on flight to safety flows boosted by an escalation in Sino-U.S. tensions.
Industry sources say a surge in demand for foreign-currency denominated life and pension insurance since Japan's move to negative interest rates three years ago has seen at least 4 trillion yen ($37.8 billion) of such products being issued, or one percent of the bloated Japanese insurance market.
Japan's life insurers, big players in the global financial markets, thus hold foreign-currency bonds as a hedge against the currency risk stemming from these products.
(Graphic: Chasing higher yields - https://tmsnrt.rs/2MNY2Ty)
For instance, Taiju Life Insurance, the country's fifth largest private life insurer, has been increasing holdings of foreign bonds by 350 billion yen a year in recent years.
Such flows can exert downward pressure on the yen, because by far, the majority of other foreign bond investments by investors are currency-hedged, thus having a neutral effect on the Japanese currency.
Some analysts say heavy demand for the U.S. and Australian dollar for these Japanese insurance products is likely to have helped to cap the yen in recent years.
"Together with foreign asset buying by the government's pension fund, they are helping to curb the yen's strength," said Yoshinori Shigemi, global strategist at JPMorgan (NYSE:JPM) Asset Management.
But now, the products are coming under more intense scrutiny due to a rise in complaints, and many analysts think yen selling stemming from these products will likely slow.
That would be a headache for policymakers as the yen - considered a safe haven currency and hovering at seven-month highs versus the dollar - is likely to stay resilient with the trade war unresolved amid growing uncertainty about the global economy. The yen tends to strengthen during times of economic stress as Japan is the world's largest creditor.
The Life Insurance Association of Japan said the number of complaints from customers who bought such products at banks, a major distribution channel for the product, doubled in three years to 2018/19.
The biggest complaint was that sales staff at banks did not fully explain risks, including the possibility investors will not get back what they paid for if the yen strengthens sharply.
The country's financial watchdog is also tightening its grip on foreign insurance products.
"We have been checking whether flyers insurers hand out to investors properly explain the risks. We are also starting to enhance our product review," said an official at the Financial Services Agency.
Exactly how much insurers will slow sales of these products is not clear, given that, for some firms, these have been the main drivers of their top line growth.
Still, complaints about the product are now coming not just from investors but also from rival financial institutions, such as asset management firms.
"A lot of consumers have the impression that 'insurance' is safe when in fact they are taking financial risks," said JPMorgan Asset's Shigemi. "Foreign currency-denominated insurance, in a way, is a bit like an oxymoron."
($1 = 105.9300 yen)