The dollar in Japan: Investment risk or opportunity?

By Rika Otsuka

TOKYO, March 18 (Reuters) - The rapid rise of the yen to a 13-year high against the dollar is unprecedented for many Japanese investors, prompting them to think twice about keeping funds in the beleaguered U.S. currency.

Others though, such as many of Japan's retirees, see an opportunity in paying less than 100 yen for one U.S. dollar for only the second time in recent history.

Resona Bank, Japan's fourth-largest bank, said the number of new dollar deposit accounts opened in the first 17 days of March was six times greater than for the whole of February.

"Retail clients were definitely in action. There were twice as many new dollar deposit accounts openned on Monday alone as there were for the whole month of February," a spokesman said. He declined to be specific.

The differing reactions from investors partly reflect just how dramatic the fall in the dollar has been against the yen.

It dropped as low as 95.77 yen on Monday, down 14 percent so far this year, already one of the biggest moves in a quarter in eight years. In the first quarter last year the dollar fell just 1 percent against the yen and during all of 2007 it fell just over 6 percent.

The U.S. currency has been hit by a storm of negative factors: a deepening financial crisis originating in the U.S. mortgage market, aggressive Federal Reserve rate cuts and concern that the economy may already be in recession.

That's troubling many Japanese investors, who have ploughed no less than 11 trillion yen ($113 billion) into U.S. securities in the past three years as they sought higher returns compared with a sluggish Tokyo stock market and domestic interest rates, which the central bank has kept close to zero since the mid 1990s.

The dollar last traded at less than 100 yen between mid 1994 and late 1995. Since then it has risen to trade close to 150 yen but until last week hadn't been below 100 yen again, perhaps explaining why some investors are uncertain about what to do next.

Will the dollar keep falling as it did in the 1990s to less than 80 yen, or will it rise again as it so often has when falling towards 100 yen?

"We have no choice but to be extra cautious about buying dollar assets," said Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance, which manages 5.8 trillion yen ($60 billion) of assets.

"The dollar will not keep on sliding one-sidedly. But at the same time, it is unlikely to rebound strongly," Sakurai said.

WHAT TO DO?

For Japanese life insurers -- big investors in U.S. bonds -- the rising yen would seem to offer an opportunity to buy U.S. Treasuries at cheap levels. Indeed, their usual practice is to buy U.S. bonds when the yen rises, Sakurai says.

But with the dollar falling so quickly and the added concern of more U.S. rate cuts to reduce returns from bonds, life insurers are having a rethink.