Japan Insurers May Take More Exchange Risk on Bonds, Daiwa Says

Japanese life insurers may increase holdings of foreign bonds in the fiscal second half on speculation a recovery in the U.S. will limit gains in the yen, according to Daiwa Institute of Research.

Meiji Yasuda Life Insurance Co., Japan’s third-largest life insurer, said it may raise investment in foreign bonds by 200 billion yen ($24.6 billion), mostly through purchases of securities without currency hedges. Nippon Life Insurance Co., the market leader, plans to maintain or increase holdings of foreign bonds after raising non-hedged overseas debt by a net 380 billion yen in the first half. The Federal Reserve is mulling increases in its Treasury purchase program intended to keep borrowing costs low.

“Life insurers may be expecting that the yen’s advance against the dollar is poised to halt once the Fed eases monetary policy in early November,” said Yuji Kameoka, a Tokyo-based senior economist at the unit of Japan’s second-largest brokerage.

Meiji said it expects the yen may fall to 87 per dollar at the end of March 2011 after rising to as high as 78. The insurer boosted holdings of non-hedged foreign bonds by 270 billion yen in the first half from a “medium- to long-term perspective,” said Yasuharu Takamatsu, deputy president and head of investments.

Nippon Life projected the yen may rise to as high as 75 against the dollar and fall to 85 at the end of March.

“We may boost holdings of foreign debt if the yen’s levels are judged to be relatively cheap,” said Yosuke Matsunaga, general manager of the company’s finance and investment planning department.

Fed Purchases

The Fed may purchase $2 trillion of assets to stimulate the U.S. economy and start by announcing a fresh round of easing at its next meeting that ends on Nov. 3, Goldman Sachs Group Inc. estimates. The central bank bought $300 billion of Treasuries in 2009 under a policy known as quantitative easing, or QE. It said in August it would reinvest principal payments from its holdings of mortgage debt in U.S. debt.

With the market having already priced in large-scale asset purchases by the Fed, inflation expectations are rising in the U.S., Daiwa’s Kameoka said. The Japanese currency may stop rising at the 80 per dollar level and weaken to about 87 at the end of March as Treasury yields rise, he said.

Sumitomo Life Insurance Co. will “flexibly invest in foreign bonds in the second half” after a net increase in non-hedged overseas debt in the first two quarters, according to Haruhisa Hirata, deputy general manager at the firm’s investment strategy section.

‘Sense of Achievement’

There will be a “sense of achievement” if the yen breaches its postwar high of 79.75 per dollar, and the currency may “return to a normal range” of 88 by the end of March, Hirata said.

Global risk aversion amid Europe’s debt crisis and slowing U.S. growth has driven gains in the yen this year, which tends to strengthen during economic turmoil as Japan’s trade surplus makes it less reliant on foreign capital. A stronger domestic currency hurts the overseas competitiveness of Japanese exporters.

Japanese life insurers typically eschew riskier assets in favor of longer-term domestic bonds. Bond yields have fallen amid sluggish growth, with 10-year yields at about 0.8 percent in Japan compared with about 2.5 percent in the U.S.

The yen reached 80.85 per dollar on Oct. 20, the highest since April 1995 and up 5.8 percent since Japan intervened to weaken its currency for the first time in six years on Sept. 15. It traded as strong as 80.90 versus the greenback today.

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