Investment Returns and Currency Hedge for the Foreign Investments: Evidence from the Japanese Life Insurance Companies

This paper investigates the relationship between the investment returns or volatilities of the Japanese life insurance companies and their discretionary decisions on the foreign portfolio investments. These decisions include the proportion of the foreign investments in their entire proprietary investments and the currency risk hedge. We also consider the scenario: when the market prevails to invest in the high-yield currencies by borrowing the Japanese yen. We establish three important results. First, the currency hedge positively relates to the investment returns under carry trade scenario but negatively otherwise. Second, the proportion of the foreign investments positively relates to the investment returns. Third, the investment returns significantly decrease under the carry trade scenario.