UPDATE 1-CBA Samurai a sign Japan investors shun forex risk

(Adds analyst comment, details, background)

By Rika Otsuka

TOKYO, April 8 (Reuters) - Commonwealth Bank of Australia Ltd (CBA.AX) is selling Samurai bonds to Japanese individual investors, as some have turned cautious about taking foreign exchange risks while continuing to seek higher yields.

CBA's sale of 40 billion yen ($391 million) in a 1.68 percent Samurai bond will be the first retail Samurai offered since GMAC, an affiliate of U.S. automaker General Motors Corp GM.N, issued such a bond in December 2003.

CBA's bond will be issued on April 28 and mature on April 28, 2011. The sales period is April 9-25.

Samurais are yen bonds issued in Japan by non-Japanese entities. They are usually sold to just institutional investors.

Samurais are popular as they offer higher coupons than debt from Japanese issuers with similar credit ratings.

"It's not hard to imagine individual investors would pick up bonds with higher coupons and no foreign exchange risks," said Yutaka Ban, chief credit analyst at Shinko Securities.

"The market may see more retail Samurai bonds if CBA's bond sale goes smoothly," Ban said. Japanese individual investors, tired of low interest rates at home, have actively bought overseas assets in the past few years in a quest for better returns, while Japanese interest rates stay the lowest among the world's industrialised nations.

The Bank of Japan will conclude a two-day policy meeting on Wednesday at which it is widely expected to leave the benchmark overnight call rate at 0.5 percent.

Uridashi bonds, foreign currency bonds sold to Japanese individual investors, have been especially popular in Japan due to their high yields.

A typical Australian dollar-denominated uridashi bond now gives a coupon higher than 6 percent, while New Zealand uridashi bonds come with a coupon higher than 7 percent.

But unlike Samurai bonds, uridashi bonds involve foreign exchange risks and some Japanese individual investors are more concerned about such risks now due to high volatility in the foreign exchange market in the past few months. The yen surged across the board last month, hitting a 13-year peak against the dollar, as the global credit crunch and fears of a U.S. recession sparked massive unwinding of risky yen carry trades.

In carry trades, investors use low-yielding currencies such as the yen to finance purchases of assets offering higher returns elsewhere.

Many Japanese individual investors now have unrealised losses on overseas assets they bought when the yen was much weaker.

Market participants expect more Samurai bonds to be issued as Japan's low interest rates help keep the cost of raising funds via Samurai bonds relatively inexpensive for overseas issuers.

The Samurai bond market has been a place where foreign banks could rely on in raising funds while the global credit crunch has been making it difficult for some to do so elsewhere.

CBA also sold 107.1 billion yen of five-year Samurai bonds to institutional investors on Tuesday. (Editing by Michael Watson)