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.

The top nine life insurers in Japan have assets of some $1.4 trillion. Some are keeping more of their cash closer to home in Japanese government bonds to ride out the dollar storm, market sources say.

Exporters and importers, who fuel Japan's annual global trade flows of about $1.6 trillion, are also wondering what to do next, unsure if the dollar will now rebound or keep falling.

Retail margin traders though, many of whom are salarymen and housewives, have been decidely more decisive.

They were aggressive sellers of the dollar on Monday, scrambling to cut their losses after stubbornly buying dollars last week as the currency fell 3.4 percent against the yen.

Margin trading, which allows investors to make leveraged bets on currencies, has mushroomed among Japanese individual investors who can make bets online or via their mobile telephones.

Tokyo Financial Exchange (TFX) data showed traders slashed their net long dollar positions -- of bets that the dollar would rise -- by about 40 percent to 75,265 on Monday alone.

That marked the biggest one-day drop in dollar long positions on data going back to 2006, exceeding even the massive selling on Aug. 16 last year, when the credit crunch erupted.

However, the data also suggested that these traders did not necessarily keep their cash in yen. They snapped up Australian and New Zealand dollars, where interest rates range from 7.25 percent to 8.25 percent, respectively. ($1=97.06 Yen) (Additional reporting by Eric Burroughs; Editing by Neil Fullick)