Oct. 17 (Bloomberg) -- Sumitomo Life Insurance Co., Japan's fourth-largest life insurer, said it plans to limit investment in overseas assets in an effort to reduce its currency risk.

The Osaka-based company increased its holdings of Japanese bonds by about 300 billion yen ($2.97 billion) in the six months ended Sept. 30, Hirofumi Miyahara, deputy general manager of investment planning, said in an interview this week. Japan's 10- year bond yields will keep declining and local stocks will rebound more than U.S. equities as the world's second-largest economy is relatively sheltered from the credit-market crisis, he said.

``Right now, it's not about where we can make profit,'' said Miyahara, who helps oversee the company's 20.8 trillion yen in assets. ``There are a lot of uncertain things. We plan to increase revenue and to protect our assets.''

Japan's 10-year government bond yields will fall to 1.50 percent by the end of the fiscal year on March 31 as investors seek safety in the fixed payments of debt, Miyahara said.

The yield on the benchmark 1.5 percent bond due September 2018 fell 1 basis point, or 0.01 percentage point, to 1.575 percent as of 4:49 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker.

The yield has fallen from an 11-month high of 1.895 percent in June as the credit crisis sent the Nikkei 225 Stock Average to a five-year low last week.

Still, Sumitomo Life is unlikely to increase its bond holdings further in the next six months after raising the amount in its portfolio during the previous half year, Miyahara said.

Meiji Yasuda

Sumitomo Life's forecast for the 10-year yield is lower than the 1.60 percent estimate made last week by Meiji Yasuda Life Insurance Co., Japan's third-largest life insurer. Meiji Yasuda plans to cut its domestic bond holdings by 250 billion yen this financial year while boosting its overseas holdings to secure higher interest payments, Yasuharu Takamatsu, head of the investment department, said last week.

U.S. and European stocks are likely to remain weak as concern that more financial institutions will fail due to the global credit squeeze deters investors from buying equities, Sumitomo Life's Miyahara said.

``Even though the companies at risk are guaranteed by the government, nobody is going to want to trade with them,'' he said. ``This division will continue'' and weigh on U.S. and European stocks.

Japanese companies are more sheltered from the financial turmoil, and this should help the Nikkei 225 rebound to 11,500 by the end of March, he said. The Nikkei gained 2.8 percent today to 8,693.82. It fell as low as 8,115.41 on Oct. 10, the weakest level since May 2003.

Rates on Hold

Japan's relative stability will enable the central bank to keep its benchmark interest rate on hold until at least the end of March, Miyahara said.

The Federal Reserve will meanwhile will cut its target rate for overnight loans between banks to 1 percent from 1.50 percent to avert a recession, he said.

There is a 24 percent chance the Bank of Japan will reduce its key overnight loan rate to 0.25 percent from 0.5 percent by the March 31, according to Bloomberg calculations using overnight interest-swaps from JPMorgan Chase & Co.

The yen is likely to extend its gains of the past two months as the nation is seen to offer some protection from the financial turmoil, Miyahara said.

``Given Japan has less matters of concern, the yen will remain strong,'' he said.

The yen traded at 101.03 per dollar today, after gaining 5.2 percent in the past three months. Japan's currency may rise as high as 90 per dollar this fiscal year before trading at 100 yen at the end of March 2009, Miyahara said.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa@bloomberg.net.

Last Updated: October 17, 2008 04:00 EDT