Japanese Insurance Capital Invested Abroad Expected to Move Home

(March 15, 2011) – With upward of $3 trillion in assets held offshore, Japanese investors – including many massive insurance companies that fear heavy losses from the 9.0 Sendai earthquake and tsunami and the potential nuclear disaster that leaves a world captivated – are expected to move at least some capital home.

Approximately $900 billion of this estimated $3 trillion in capital is invested in American dollar-denominated equities, bonds, and other securities, according to US Treasury Data obtained by the Wall Street Journal. Much of this will be insurance capital, with Nippon Life, Meiji Yasuda, and Tokio Marine – the three largest Japanese insurers – representing over US$680 billion in assets. (The world’s largest asset owner, Japan’s Government Pension Investment Fund, mainly invests domestically). With insurance costs expected to be in the tens, if not the hundreds, of billions of dollars following the disaster, some of this American-based capital, plus assets held in other international locales, is expected to be liquidated to meet liabilities. Japan is the second largest holder of US Treasury debt, following its neighbor China, but due to the vagaries of the Japanese market – March is the end of the country’s fiscal year, and this commonly causes a slight capital repatriation – numbers released soon are unlikely to hold much significance.

The only proxy in modern times to such a disaster and potential repatriation of Japanese capital is the Kobe earthquake of 1995, where “significant outflows of funds from Japanese foreign holdings” occurred – albeit almost nine months after the January earthquake, according to the Journal.

The potential move – the size of which is unclear at this point – will likely exacerbate concerns over a fall in the price of Treasury bills, already significant after the nation’s most prominent fixed-income investor, California’s Pacific Investment Management Company (PIMCO) announced plans to void its flagship fund of all American government debt holdings. Additionally, the two leaders of PIMCO, Bill Gross and Mohammed El-Erian, plus Warren Buffett, have all called for an end to the Federal Reserve’s purchase of Treasury bills, known as QE2. “It’s not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection,” Gross told CNBC earlier this month, explaining his firm’s move toward decreasing allocations to government debt. Describing where the capital would flow once it leaves US debt, Gross suggested that the beneficiaries would be “…corporate bonds, those would be a smattering of high yield bonds and a growing proportion of emerging market debt which yields in the 5% to 6% category. Are these bonds as safe as Treasuries? No, they are not triple-A types of investments, but they’re not overvalued based on quantitative easing procedures that we’ve seen over the past 12 months.”