By Yasuhiko Seki and Yumi Ikeda April 12 (Bloomberg) -- The yen may drop to 100 per dollar this year as a recovery in the world’s biggest economy prompts the Federal Reserve to increase interest rates ahead of the Bank of Japan, according to Dai-ichi Life Insurance Co. The Japanese currency may extend its drop to 105 per dollar by March 2011 as the Fed raises the federal fund rates to as high as 2 percent, said Yasuhiro Miyata, general manager of the foreign fixed-income investment at Japan’s second-largest life insurer. “Given these prospects about the yen and Treasuries, as well as improvement in risk sentiment, buying U.S. debt without pre-hedging borrowing costs will become more attractive,” Miyata said in an interview on April 9. Dai-ichi Life’s initial public offering on April 1 was the world’s biggest in two years, raising $11 billion. It had 5 trillion yen ($54 billion) in foreign currency-denominated bonds at the end of September 2009 and 29.3 trillion yen in general accounts, including Japanese government bonds, stocks and loans. “As the Fed normalizes interest rates, 10-year U.S. yields will reach 4 to 4.5 percent, which we reckon as fair value, by the end of March 2011,” Miyata said. The yield on the securities was 3.91 percent as of 10:43 a.m. in Tokyo from 3.88 percent in New York on April 9. Futures on the CME Group Inc. exchange showed on April 9 a 53.4 percent chance the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by November. The Federal Open Market Committee has kept the federal funds rate target for overnight loans between banks at zero to 0.25 percent since December 2008. The Fed raised discount rate, covering direct loans to commercial banks, to 0.75 percent in February. The Bank of Japan’s benchmark rate is 0.1 percent. Fed Rates “Before actually hiking interest rates in the October- December quarter this year, I expect the Fed to increase its official discount rate two more times to expand the yield gap between it and the federal fund rate to 100 basis points,” Miyata said. Fed Bank of Kansas City President Thomas Hoenig said last week the central bank should consider raising the key interest rate “sometime soon” to about 1 percent to prevent asset bubbles from emerging. Hoenig has dissented from Fed policy statements this year, citing concern its commitment to keeping interest rates low for “an extended period” could lead to a buildup of “financial imbalances” and increase risks to economic stability in the longer term. Greece Concerns Miyata maintains a cautious stance toward Greek bonds, citing credit concerns. Once the nation proves it can cut its fiscal deficit and guarantee the credibility of its debt figures, Greek bonds may re-emerge as a viable investment target, he said. “Default risk has declined notably,” he said. “Still we can’t rule out the possibility of rescheduling debt payment by Greece.” The euro may fall to as low as $1.30 by the end of September, he said. After Miyata spoke last week, European governments offered Greece a rescue package worth as much as 45 billion euros ($61 billion) at below-market interest rates in a bid to stem its fiscal crisis. Miyata expects the People’s Bank of China will revalue the Chinese currency in the latter half of 2010 to deal with rising inflationary pressure there. “The revaluation of the yuan is likely to strengthen Asian currencies by triggering fund allocation shifts to neighboring countries, excluding Japan,” he said. “Given the yield advantage of these nations and relatively solid economic growth, Asian bonds, including South Korean debt, are looking attractive.” Japan’s economy may benefit from yuan revaluation if the subsequent boost in the currencies and buying power of Asian nations sparks higher demand for exports, he said.

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