April 23, 2018 / 7:10 AM / a year ago

UPDATE 1-Dai-ichi Life: Unlikely to increase FX-hedged foreign bonds in 2018/19

* Unlikely to up FX-hedged foreign bonds given high hedging costs

* May buy foreign bonds without FX hedge when dollar is Y100-105

* U.S. inflation to hit 2 pct, sees 3 Fed rate hikes this year

* U.S. recession possible next year (Adds detail, more comments)

By Hideyuki Sano

TOKYO, April 23 (Reuters) - Japan’s Dai-ichi Life Insurance is unlikely to increase its holdings of currency-hedged foreign bonds in the financial year to March 2019, due to elevated costs of currency hedging, a senior executive said on Monday.

The insurer could buy foreign bonds without such hedging when the yen becomes strong, as Dai-ichi does not see a sustained gain in the Japanese currency, Kazuyuki Shigemoto, general manager of investment planning, told reporters.

Dai-ichi Life is Japan’s second-largest private life insurer and the core firm of Dai-ichi Life Holdings, with 37 trillion yen ($343 billion) of assets under its management.

Market players closely watch Japanese investors’ stance on foreign bonds and currencies. They have bought foreign bonds aggressively in recent years as an alternative to low-yielding domestic bonds.

But rising currency hedging costs are sapping their appetite.

“It all depends on the levels of hedging costs and yields. But we see a very low likelihood that our holdings of currency-hedged foreign bonds increase this financial year,” Shigemoto told reporters.

Dai-ichi could increase the holdings of foreign bonds without currency hedging instead, Shigemoto said, should there be a chance to buy foreign currencies on a dip.

“As of now, we would regard the dollar around 100-105 yen as bargain-hunting levels,” Shigemoto said.

Dai-ichi expects the yen to be capped given that the Bank of Japan will likely maintain stimulus even as many other central banks around the world move to raise interest rates or remove stimulus.

Dai-ichi also expects U.S. inflation to pick up, prompting the Federal Reserve to raise interest rates three times this year.

Noting that U.S. CPI tends to track U.S. GDP with a delay of about six quarters, Shigemoto said U.S. inflation is likely to rise above two percent this year.

But Dai-ichi also sees the risk of an economic downturn looming.

“In the past, U.S. recessions have started 33.8 months after reaching full employment on average. Now we are already 20 months into full employment, so you could say, from past records, a recession is possible in about a year,” he said.

With an eye on that, Dai-ichi plans to reduce its holdings of foreign stocks in the current financial year.

“Our holdings of foreign stocks are likely to drop this financial year. When you look beyond to the next financial year, it is time to lock in profits,” he said.

$1 = 107.80 yen Additional reporting by Tomo Uetake Editing by Jacqueline Wong

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