Japan's growing taste for risk

By Eric Burroughs

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 <ZAR=D4> 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 <JPYEEXR=J> -- 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.  Continued...