August 7, 2008 / 2:15 AM / 11 years ago

In wounded world, Japan's taste for risk only grows

TOKYO (Reuters) - Even as caution rules for investors around the world nursing wounds from the year-old credit crisis, Japanese households are still eager to take risks and buy exotic currencies in their relentless quest for higher yields.

In the past few months the South African rand has become the top currency for wealthy Japanese households buying uridashi bonds that are sold directly to them by securities firms, the first-ever Russian rouble uridashi was launched and the Brazilian real is now an option.

More surprisingly, Japanese currency day-traders, who make leveraged bets with borrowed funds, have snapped up the Australian and New Zealand dollars in a big, risky bet that their slide against the yen will be limited.

Such trades can backfire if those currencies fall sharply and wipe out the returns offered by higher rates. In the case of the kiwi, professional traders are worried that any rush to the exits by the Japanese day-traders could exacerbate any tumble.

But the hunt for yield in more exotic destinations highlights just how persistent Japanese investors are in selling their low-yielding yen to secure better returns via foreign currencies and bonds, especially with stock markets still looking shaky.

“Capital outflows are a structural trend in Japan,” said Stephen Jen, chief global currency strategist at Morgan Stanley.

The persistent flow of funds out of Japan has served as a source of liquidity while many banks are hoarding cash, and it has kept the yen weak against a wide array of currencies.

The yen’s real trade-weighted value — the broadest measure of its performance — hit a seven-month low in July, down 6 percent since March when it reached a 13-year peak against the dollar. Over the past five years, the yen’s broad value has fallen by 17 percent.

Analysts link the search for higher returns abroad with a generational change in Japan’s ageing society and a break with the conservative stance of keeping so much money — about 750 trillion yen ($6.9 trillion) — in cash and deposits often yielding about 0.5 percent.

Royal Bank of Scotland said in a report that the household shift to foreign assets was a “demographically based regime change” that created a headwind against any yen gains.

In July, Japanese workers investing summer bonuses were snapping up assets in Brazil and other Latin American countries.

Sixty-three new mutual funds were launched last month that attracted 338.4 billion yen ($3.2 billion). UBS Global Asset Management’s Brazilian real bond fund was the most popular, according to data from fund tracker Lipper. The second most popular such “toushin” mutual fund was a UBS emerging currency vehicle.

At the same time, the government-affiliated mega asset managers — the Government Pension Investment Fund, Japan Post Bank and others — are slowly shifting funds out of low-yielding domestic government bonds.

(For a graphic on the yen and foreign asset holdings, click on: here)

RISE OF THE KIMONO TRADERS

An explosion in currency day-trading has been another that has made ripples in Tokyo’s exchange market and typifies Japan’s infatuation with all things foreign.

Advertising for online margin trading brokerages dot Tokyo’s subway lines, offering tight spreads and leverage that sometimes allows traders to boost bets by 100 times and more.

A survey among Tokyo’s top banks and brokers showed a 56 percent jump in trading in minor currencies to a daily average of $29.1 billion in the year to April.

The rising volumes mean professional FX traders track the trends of the individual traders, dubbed “Mrs. Watanabe” or the kimono traders because of the trade’s popularity with women.

The appetite of Japan’s individual traders for the sliding New Zealand dollar has worried the professionals because the kiwi is not as widely traded as other currencies, and thus moves can sometimes be very sharp.

The kiwi NZD=D4 has been hit by expectations of interest rate cuts from their steep levels of 8 percent as the economy appears to have fallen into a recession for the first time in a decade.

On the Tokyo Financial Exchange (TFX), one of the main intermediaries in the margin trading market, long New Zealand dollar positions have roughly doubled in less than two weeks to a record high as of last Friday. Long positions in the kiwi and the Aussie make up about 80 percent of all long positions on the TFX.

“That’s a bit scary, quite scary really,” said Gerrard Katz, head of North Asia FX trading at Standard Chartered in Hong Kong.

JPMorgan Chase estimates that the day-traders’ long position in foreign currencies totals nearly $50 billion.

But Junya Tanase, a strategist at JPMorgan in Tokyo, says that anecdotal reports suggest the traders have become less leveraged than a year ago when their forced selling added fuel to a plunge in the kiwi and Aussie AUD=D4.

Tanase said the traders could probably withstand a drop in the kiwi to near 70 yen. The kiwi was near 78.50 yen NZDJPY=R on Wednesday.

Analysts also believe traders who got burned last year have learned their lessons.

“They can tolerate a much larger decline,” Tanase said.

(Additional reporting by Rika Otsuka)

($1=108.34 Yen)

Editing by Tomasz Janowski

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