Nippon Life to boost unhedged foreign bonds in H2 08/09

TOKYO Oct 21 (Reuters) - Japan's Nippon Life Insurance Co. said it plans to boost its unhedged foreign bond holdings by a net 300 billion yen ($2.94 billion) in the second half if the yen extends its gains against the dollar and the euro.

The nation's top life insurer by asset expects the dollar/yen rate to fall as low as 85 yen in the October-March period, below the 13-year low hit in March, as it thinks the Federal Reserve will keep cutting interest rates to combat a sharp slowdown in the U.S. economy.

"What concerns us most is how cheaply we can buy unhedged foreign bonds," said Tomiji Akabayashi, general manager of Nippon Life's finance and investment planning department.

"If the yen gains more against the dollar than versus the euro, we will buy the dollar. And we may also buy the euro if the yen rises beyond a level like 140 yen," Akabayashi said at a news conference.

Japan's top nine insurers held around $1.5 trillion in assets as of March -- almost the size of the economy of Spain -- and market players keep a close watch on their plans because they often affect currency markets in the long-term.

Nippon Life forecast the dollar would trade around 95 yen and the euro around 140 yen at the fiscal year-end in March.

That is sharply lower than its April outlooks of 110 yen and 150 yen respectively, when it thought the U.S. economy would recover in the second half and lift the dollar.

Nippon Life sold a net 300 billion yen of unhedged foreign bond holdings in April-September, mostly in euro-denominated bonds when the euro was above 160 yen.

On the other hand, it raised its hedged foreign bond holdings by a net 500 billion yen to take advantage of jumps in U.S. yields.

Japan's No.1 insurer manages 45.4 trillion yen of assets on behalf of policy holders, of which 5 percent was invested in unhedged foreign bonds at the end of September. About 60 percent of that was in euro-denominated bonds and 30 percent was in the dollar, Nippon Life said.

Its hedged foreign bond holdings comprised 7 percent of its total assets.

On Tuesday, the dollar was trading near 102 yen JPY= above a seven-month low of 97.91 yen hit this month and a 13-year low around 95 yen touched in March. The euro was changing hands at 135.50 yen EURJPY=, off a three-year low around 132 yen reached earlier this month.

GSE AND SAMURAI BONDS

Nippon Life said it holds 3 trillion yen of bonds issued by U.S. government-sponsored enterprises (GSE) in both hedged and unhedged forms.

The insurer said the U.S. federal takeover of Fannie Mae FNM.N and Freddie Mac FRE.N made it clear that such securities now have government guarantees but its investment decisions continue to depend on profitability.

"We would naturally sell them if the bonds' profitability sags compared to other investment tools," said Akabayashi at Nippon Life.

The insurer also held about 700 billion yen of bonds issued by foreign entities, mostly in the yen-denominated bonds such as Samurai bonds.

JGB AND NIKKEI

Nippon Life boosted its domestic bond holdings by a net 400 billion yen for the first half by buying super-long Japanese government bonds -- longer than 10-year maturities -- and asset-backed securities as well as corporate bonds.

After having used all its funds allocated to domestic bonds for the fiscal year, the insurer expects to reduce them by a net 100 billion yen in the October-March period, especially with issuance of corporate bonds subdued after the credit crisis.

It expects the 10-year JGB yield to stay between 1.4 and 1.8 percent for the second half as it expects the Bank of Japan will keep interest rates unchanged in the coming months with a risk scenario for a lower rate than the current 0.5 percent.

The insurer forecasts that the 20-year JGB yield will trade around 2.2 percent at the end of March 2009.

Nippon Life plans to increase domestic and overseas stock holdings by a net 100 billion yen in the second half, with a view that selling of Tokyo shares had gone too far and the Nikkei share average could rebound to 12,000 at the end of March.

On Tuesday, the 10-year JGB yield traded around 1.590 percent JP10YTN=JBTC near a three-month peak of 1.630 percent struck this month. The 20-year yield was around 2.215 percent JP20YTN=JBTC.

The Nikkei share average .N225 traded around 9,200 after suffering a historic sell-off earlier this month amid the intensifying global financial crisis. (Editing by Hugh Lawson)