TOKYO (Reuters) - Japan Post Bank Co Ltd (7182.T) plans to allocate "a few hundred billion yen" toward alternative assets such as private equity, real estate and hedge funds this business year, its chief investment officer said on Tuesday.
Katsunori Sago, who is tasked with improving returns on the former state-owned behemoth's $2 trillion assets, also told Reuters in an interview he does not expect the yen to weaken this year.
Market players will closely watch how Sago, a former Goldman Sachs executive, diversifies Japan Post's portfolio, once mostly comprised of Japanese government bonds (JGBs).
Its need to find new revenue sources beyond JGBs has become acute after the Bank of Japan introduced negative interest rate this year.
"Clearly, we cannot invest in interest rates markets. In Japan, interest rates markets are very big and it is not easy to give up on them. But if you look around the world, there are many other markets that have depth. We should steadily build up those assets in our portfolio," Sago said.
For diversification, he said the focus would be on private equity, real estate and hedge funds, in that order.
The bank also plans to continue increasing investment in foreign bonds with currency hedging - a popular strategy among Japanese institutional investors.
Sago said the bank has little appetite for currency risks.
Given the volatility of currencies and their returns, "you can see it is a risk not worth taking unless you have a strong conviction that the yen will fall," Sago said.
He said the yen is still relatively cheap in terms of purchasing power but its current levels, around 108 yen to the dollar JPY=, are close to fair value given the prospects of monetary tightening in the United States and easing in Japan.
Sago also said he advises against buying long-term JGBs at current levels.
The 30-year JGB yield fell to around 0.3 percent JP30YTN=JBTC from 1.2 percent before negative interest rates, as investors flocked to bonds still having positive returns.
But Sago said the sharp fall cannot be justified as the BOJ's rate cut was just 20 basis points, to minus 0.10 percent from plus 0.10 percent.
"You should avoid making investment judgment by paying too much attention to avoiding negative interest rates," he said.
In Japan, Sago added, "negative rates are emotionally affecting investment judgments. To avoid negative interest of a few billion yen, (some investors) are making investments that could lead to a loss that is 10 times, or even 100 times bigger. This is very dangerous."
Reporting by Hideyuki Sano and Tomo Uetake; Editing by Chris Gallagher and Richard Borsuk