Japanese investors are pouring money into foreign stocks, putting more downward pressure on an already weak yen.
Japan's economic revival has spurred individual investors to look for alternatives to the country's low yields and lagging domestic stocks. The shift has sparked a craze for hybrid mutual funds that feature a jumble of foreign assets, from shares to real estate investment trusts (REITs) and high-yield bonds.
The boom in hybrid funds is a big reason for the yen's fall to a 4-1/2-year low against the dollar last month, a record low against the euro and a 15-year trough versus sterling on Monday.
Retail investors are easily motivated to build more positions on the dollar's dips because they're making profits right now, said Takahide Nagasaki, deputy general manager of fixed income, currency and commodities research at Daiwa Securities SMBC.
Such psychology may not change for a while, said Nagasaki, forecasting the dollar may rise to 125 yen and the euro towards 175 yen in the latter half of this year.
The dollar was trading around 123.20 yen on Tuesday, while the euro was near 167.75 yen.
An estimated 1.5 trillion yen ($12 billion) flowed into investment trusts last month. Market players, including Fidelity Investments and Daiwa Asset Management, launched 29 new funds.
Individual investors have lately showed a strong tendency to diversify their assets, and money is shifting into global markets, said Yoshiaki Kaneko, vice chairman of the Investment Trusts Association, Japan. Funds with high returns that invest in multiple regions have had the most inflow.
Japanese investment trust holdings of foreign assets rose by 10.6 trillion yen in the first six months this year to a total of 46.8 trillion yen, driven by an inflow of 5 trillion yen into foreign hybrid funds, Nomura Research Institute data showed.
By contrast, domestic stock funds saw outflows of 922.3 billion yen in the same period.
A HOT TIP FROM A BASEBALL PRO
One thing that might change the tide of money flowing abroad, analysts said, would be a surge in the Nikkei share average, which could persuade households to shift more funds into domestic stocks, potentially boosting the yen.
The Nikkei has risen 12 percent in the past 18 months, but the Standard & Poor's 500 climbed 22 percent in the same period, while the benchmark index for Australian shares, a favourite choice of investment trusts lately, jumped 33 percent.
Japan is not susceptible to an inflation scare, unlike other major economies, and that may mean growth will remain steadier and last longer, said Stephen Jen, head of global currency research at Morgan Stanley.
If and when the Nikkei starts to outperform, the yen can rally, supported by local flows, Jen said in a note to clients.
Tohru Sasaki, chief currency analyst in Tokyo at JPMorgan Chase, said the yen's direction could even be influenced by Japanese baseball star Ichiro Suzuki of the Seattle Mariners.
Ichiro has appeared in commercials for Japan's third-biggest broker Nikko Cordial Corp. and now promotes funds investing abroad to lure investors.
If Ichiro comes up on a TV commercial and says, 'Hey, it's time to invest in the Nikkei', I would have to think twice about my call to sell the yen, Sasaki said.
One of the biggest funds to launch this year was a hybrid investment trust set by Nomura Asset Management in late February, which gathered 178.7 billion yen ($1.45 billion) on the first day of sale and has nearly doubled its assets since then.
The Nomura fund, called Global All-Stars, invests in global stocks, high-yield bonds and REITs.
Analysts said retail trust funds like Nomura's, which pay returns on a monthly or quarterly basis, have become a magnet for senior citizens and retiring baby boomers who want to supplement their future income.
The hybrid funds have a strong appeal to first-time investors because they tend to be less volatile than single-asset funds, while more individuals are moving part of their savings into investment products.
The ratio of people coming to buy funds with cash has risen compared with the past, said Shuichiro Tanaka, deputy general manager of the investment trust department at Daiwa Securities.
Favorable market conditions with rising stocks abroad and a weakening yen provide an additional push for senior citizens.
A Reuters monthly survey last month showed retail investors are getting a taste of the exotic, with emerging markets such as India and Russia increasing in popularity.
A retired man in his 60s with financial asset holdings of more than 50 million yen said he was considering investing in Vietnam, while a businessman in his 60s with financial assets of more than 30 million yen said he wanted to invest in Turkey.
(Additional reporting by Yuka Obayashi and Michiko Iwasaki)