* Uridashi, institutional flows chase Brazil's high yields
* JPY/BRL carry trade has returned over 7 pct so far in 2014
* End of Brazil rate-rise cycle may cool investor enthusiasm
By Lisa Twaronite
TOKYO, May 14 The wide gap between Japan's
interest rates and those of Brazil's has attracted investors to
the yen carry-trade for Brazilian assets in spite of emerging
Borrowing cheap yen to fund purchases of Brazilian stocks
and bonds has proven a winning strategy so far this year. Some
analysts, however, think investor sentiment could cool with
Brazil's interest rates not expected to rise further and on
potential political risks.
The Bank of Japan's massive monetary stimulus unfurled 13
months ago has kept Japanese rates at rock-bottom levels, in
sharp contrast with Brazil's 11 percent benchmark.
With most other major currencies such as the dollar and the
euro offering yields only slightly better than the yen, retail
and institutional investors are looking to higher-yielding
emerging markets. The feel-good factor of the forthcoming World
Cup is also giving sentiment towards Brazil a boost.
"With all the hype of the World Cup, the overall sentiment
is one of buoyancy," said Bart Wakabayashi, head of forex at
State Street Global Markets in Tokyo. "There's still reason to
like the long-Brazil trade."
Although a slowing Brazilian economy dented Japanese
appetite for the real in 2012-13, the real became popular
again after the Brazilian central bank raised its benchmark
Selic by a total of 3.75 percentage points in nine straight
increases since April 2013. But with the country's inflation
rate rising less than expected in April, expectations are
growing the central bank will pause its monetary tightening
SEEKING YIELD ABROAD
BRL-denominated uridashi -- bonds targeted at Japanese
retail investors -- rose sharply this year as a percentage of
emerging market issuance, even as total uridashi issuance has
shrunk, Brown Brothers Harriman data show.
As of last month, BRL-denominated uridashi issuance has
comprised more than half of total emerging market uridashi
issuance, up from an average share of 29 percent in 2007-2013.
The potential for hefty returns has not escaped the notice
of even some traditionally conservative Japanese investors, and
market sources with access to institutional flow data cite
increased carry-trade activity in recent months.
A senior official at Japan's second-largest private life
insurer Dai-ichi Life Insurance Co told a news
conference last month the insurer would not buy Japanese
government bonds at current low yields and that it added Brazil
to its stock and bond portfolios last financial year.
According to Thomson Reuters Eikon's carry trade model, a
yen investment in the Brazilian real would have earned more than
7 percent so far this year, with Sharpe ratio of 1.93, a level
that suggests a good return in comparison to risk.
In comparison, the Australian dollar returned about
3.6 percent with Sharpe ratio of 1.57.
The real has gained about 5 percent against the U.S. dollar
but it has stabilised since mid-April as the market expects
Brazilian rates to stop rising soon, leading some market players
to question how long investors will keep buying.
"Our clients who have already invested in Brazil ask about
the risks," said Masashi Murata, senior currency strategist at
Brown Brothers Harriman in Tokyo. "Most say they want to wait
until the next central bank meeting, because they want to check
the stance on hiking rates," he said.
A shift in Brazil's monetary policy could come even before
the World Cup's June 12 kick-off. The Banco Central do Brasil
will conclude a two-day meeting on May 28, which could herald
the end of the widening of the interest rate differentials that
have made the trade so attractive.
Brazil's October presidential election also clouds the
outlook. President Dilma Rousseff was once considered the
favorite to win a second term, but has slipped in recent polls,
and an upset could lead to market volatility.
"The recent situation is good for Brazil, but some
professional investors think U.S. Treasury yields will rise
more, so they don't have to invest in riskier assets, like
Brazil's, for higher yields," Murata said.
(Additional reporting by Hideyuki Sano; Editing by Jacqueline