Greenspan says carry trade has limited room to run

By Pedro Nicolaci da Costa and Tamawa Kadoya

NEW YORK (Reuters) - A popular investment strategy where investors borrow cheaply in yen to buy higher-yielding assets elsewhere can only continue for so long, former Federal Reserve Chairman Alan Greenspan said on Wednesday.

The strategy, known as the yen carry trade, is still going strong, but "at some point it's got to turn," Greenspan told a trading technology conference.

Japanese patriotism was partly behind the pattern, he said. Government debt is owned predominantly by domestic investors in Japan, despite offering some of the lowest rates in the world.

"The people who are getting the carry trade spread are being subsidized by Japanese consumers," Greenspan added.

The yen edged up against the dollar JPY= and the euro EURJPY= after his comments.

It was not the first time Greenspan had moved markets. Last week, he took investors by surprise by saying he saw a chance that the U.S. economy could slip into recession this year.

Already vulnerable to such fears, stock markets around the world took a severe plunge, with the Dow Jones industrial average .DJI losing over 400 points in a single session.

Trading has been volatile since that turbulent Tuesday, with financial markets seemingly reassessing risk following a prolonged period of low volatility which some had worried was bordering on complacency.

Revisiting the issue, Greenspan said the U.S. economy was in the midst of an inventory correction, and said gluts in both the housing and manufacturing sectors needed to be unwound.

If home sales and housing starts continue at their current pace, he told the conference, "it will be a long haul to get rid of this stuff." But for home sales, Greenspan believed a bottom had already been reached.

ETHICAL FINE LINE

Asked about the narrow line he must tread as both private citizen and public figure with the power to move markets, Greenspan said it was a very difficult issue that he continues to grapple with.

"I thought I had successfully moved into a state of anonymity that I cherish after being in the public domain for so long," he quipped. "I'm as much surprised that remarks I made supposedly affected the markets because I've been making those remarks for months and nobody noticed."

"I try as much as I can to avoid comments relevant to what the Fed is doing," Greenspan said. "But I have a profession and I'm a private citizen."