UPDATE 1-Japan's Meiji Yasuda Life says cautious on yen bonds, looks to foreign bonds

Wed Apr 24, 2013 4:58am EDT

* Low yields, high volatility make domestic bond investment less attractive

* Plans to buy about 500 bln yen foreign bonds, most with currency hedges

* Sees yen rebounding later in year as hopes on policy impact fade

* Plans to trim domestic stock holdings, increase foreign stocks

By Hideyuki Sano and Yoshiyasu Shida

TOKYO, April 24 (Reuters) - Japan's Meiji Yasuda Life Insurance Co is planning to increase its foreign bond investment as the Bank of Japan's massive stimulus makes domestic bonds less attractive, a company executive said on Wednesday.

Japan's third-largest private life insurer with total assets of about 30 trillion yen ($302 billion) tentatively plans to buy about 500 billion yen of foreign bonds in the fiscal year that began this month, or nearly half its targeted increase in assets for the year, Toshihiko Yamashita, chief executive of the insurer's investment division, told a news conference.

While domestic bonds will remain at the core of its portfolio, as they have the most suitable risk profile for matching against long-term liabilities, the company will be acting flexibly, Yamashita said.

"Domestic interest rates are very low while volatility is high. So investing in domestic bonds is not easy," he said.

"If it is difficult to increase yen bond holdings, we might keep our buying to a minimum and pick up alternative assets."

The 10-year Japanese government bond yield sank to a record low of 0.315 percent after the BOJ early this month unveiled a plan to almost double its balance sheet in two years, mostly by buying government bonds.

The bond yield has since bounced back to around 0.6 percent in volatile trade as investors take stock of the BOJ's commitment to boost inflation in two years from current sub-zero levels.

"When inflation has hit 2 percent, domestic bond yields won't be staying at the same levels they are now," Yamashita said.

SHIFT ABROAD

Expectations that Japanese investors will shift their money to higher-yielding foreign bonds have already helped to bring down bond yields in the United States and Europe.

Japanese life insurers, including $1 trillion state-owned behemoth Kampo Life, collectively hold 332 trillion yen in assets, making their investment plans a major focus of markets in recent weeks.

Meiji Yasuda currently plans to buy more foreign bonds with currency hedging than without during the current financial year, Yamashita said.

The company has one of the largest unhedged foreign bond positions among Japanese life insurers and therefore should have benefited from the yen's sharp fall against the dollar, which was triggered by Prime Minister Shinzo Abe's reflationary policy stance.

At the end of the March, about 50 percent of its foreign bond holdings were hedged. The dollar has risen about 28 percent against the yen since September.

But the insurer has no plan to reduce its hedging, as it does not expect the yen to weaken significantly from current levels this financial year. It sees the dollar moving between 85 and 105 yen. It traded at 99.36 yen on Wednesday.

Meiji Yasuda Life said monetary policy alone was unlikely to kindle inflation expectations and, with excessive hopes for policy likely to ease, the yen could rebound in the middle of this year.

The company also said it plans to trim its Japanese stock holdings while boosting foreign shares, especially in emerging markets.