Nov. 6 (Bloomberg) -- The yen is poised to drop against the dollar as a weak economic recovery in Japan spurs the nation’s central bank to keep interest rates near zero for longer than the Federal Reserve, Franklin Templeton Investments said.

“Conditions in Japan are arguably some of the worst amongst the developed economies,” Michael Hasenstab, who oversees $45 billion of fixed-income investments at Franklin Templeton, said in an interview yesterday in Vienna. “We do have a high conviction that the yen is overvalued. That’s a huge opportunity.”

Hasenstab, whose $19 billion Templeton Global Bond Fund beat 97 percent of its peers during the past five years, is using forward contracts to bet the yen will weaken after the Japanese currency rose 11 percent versus the dollar the past seven months.

Japan will keep its benchmark interest rate at a record low 0.1 percent through 2010, the only Group-of-10 nation that won’t raise borrowing costs next year, according to Bloomberg surveys of economists. The world’s second-largest economy may shrink 5.7 percent in 2009, compared with a 2.5 percent contraction in the U.S., where the Fed has kept its benchmark interest rate between zero and 0.25 percent since December, Bloomberg surveys show.

“The yen continues to be strong, and we really question that,” Hasenstab said. “If you look at the underlying conditions in Japan or Europe, they don’t strike us as being significantly better than the U.S., and in Japan’s case arguably worse. Ultimately that will feed through and the yen could be due for a correction.”

No Differentiation

Japan wages slid for a 16th month in September, a sign that consumer spending may be too weak to support the economy’s recovery from its deepest postwar recession. Monthly wages including overtime and bonuses slipped 1.6 percent from a year earlier, the Labor Ministry said this week.

The Japanese currency traded at 90.71 per dollar yesterday, compared with 100.99 on April 6. The yen will weaken to 101 per dollar by the end of 2010, according to the median forecast of 40 analysts surveyed by Bloomberg. Option traders see 44 percent of a chance that the yen will depreciate to that level by then.

The yen’s strength is hurting Japan’s exporters including Toyota Motor Corp. and Sony Corp. by making their products more expensive to overseas customers. Exports fell for a 12th consecutive month in September, dropping 30.7 percent from a year earlier. Overseas sales account for 12 percent of Japan’s economy, while consumer spending makes up more than half of gross domestic product.

Asian Currencies

The dollar will weaken against the currencies of Asian developing nations including South Korea and India as those economies rebound from the global recession more quickly, said Hasenstab. The region, which excludes Japan, may post the fastest economic expansion worldwide next year, according to the International Monetary Fund.

The dollar has dropped 8.9 percent against the South Korean won and 3.7 percent against India’s rupee this year. The greenback has also weakened against all of the G-10 currencies.

“There’s so much dollar bearishness that it’s permeating all currency markets without any differentiation,” said Hasenstab. “I’m not sure its justified versus the yen.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net. Ye Xie in New York at yxie6@bloomberg.net

Last Updated: November 5, 2009 19:00 EST