Life insurers and megabanks in Japan are increasing exposure to private credit and equity overseas, primarily in the US, to boost returns, says Moody's Ratings.
In response to this shift, the country's financial regulators are stepping up surveillance of such asset deployment. The intensification of regulatory oversight is credit positive for Japanese banks and insurers because it will limit their exposure to risks from private assets that are not fully transparent, says Mr Soichiro Makimoto, VP-senior credit officer at Moody’s Ratings in a report titled “Private Credit – Japan: Increasing regulatory oversight of private credit exposure is credit positive”.
Japanese life insurers are also gradually increasing investments in private credit and equity, particularly in the US, as they have more freed-up capital from the reduction in their interest rate risks that arise from mismatches between the durations of assets and liabilities.
Strategic adjustment
Insurers are making this strategic adjustment as they prepare for the March 2026 implementation of new economic capital rules, which will impose stricter penalties on interest rate risks than current regulations.
Portfolio diversification is generally credit positive, and private asset investments align with insurers' capacity to bear liquidity risks for higher returns to some extent because of their long-duration liabilities. However, investments in illiquid private assets require advanced asset-liability management techniques.
The complexity of managing private asset investments has prompted regulators to pay closer attention to this area. In its latest annual report on its monitoring of insurers published in July 2024, the Financial Services Agency (FSA) highlighted increasing investments in overseas credit and alternative assets and said it will examine their risks based on a range of data and risk management regulatory filings from insurers.