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Stock Strategist

How Will Abenomics Force This Stock to Evolve?

We expect a progressive change in this insurer's product mix and investment strategies.


Japanese investors are used to disappointment, given the economy's stagnation over the past two or three decades. The introduction of Prime Minister Shinzo Abe's economic reform plan in late 2012 represented one of the best hopes for breaking the economy out of its long-standing slump, but the situation remains fragile, complex, and highly uncertain. One thing remains clear: Given a rapidly aging (and shrinking) population in Japan, coupled with a cutback in national health-care coverage,  Aflac (AFL) has a unique long-term growth opportunity as the leading provider of voluntary medical coverage. However, the impact of Abenomics and the corresponding declines in bond yields and the yen complicate this attractive picture for one of our favorite insurers, as we anticipate lower insurance sales and investment income in the near term. As a result, it is critical that investors understand how Aflac will navigate this challenging environment to fully capture the tremendous growth in front of it.

At a minimum, we believe Aflac's product and investment strategies will have to evolve. At a product level, the changes include a heavier reliance on cancer and medical policies and a corresponding reduction in the life insurance business. For Aflac's investments, we expect to see a higher allocation for U.S.-denominated bonds, versus its traditional focus on Japanese government bonds. Overall, we think Aflac offers a high-quality opportunity to play a powerful long-term secular trend in a country where strong and investable companies are few and far between. We would be avid buyers at a discount to our fair value estimate.

Vincent Lui does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.