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The Mexican peso could be the next destination for Japanese investors U.S.

By Erin McCarthy
Dow Jones Newswires

NEW YORK-

Step away, Brazil. Japanese investors, who have long favored the Brazilian real by their high yields, could be considering the Mexican peso as a second way to generate income in Latin America.

Until now, the continued appreciation of the real-plus high yields compared to the dollar, so has the favorite investment destination for investors of the world's third largest economy, said Masashi Murata, vice president of Brown exchange rate Brothers Harriman in Tokyo.

However, the real appreciation is beginning to make the Japanese investment community look to other destinations in Latin America, and investment in Mexican pesos seem most promising. Flows may still be disrupted due to transfers related to the recent earthquake, which led to individuals and insurance companies in Japan repatriate the money invested abroad to help pay the costs of reconstruction. But the prodigious savers Japanese still have much money to put to work, and the low yields offered in Japan will continue pressuring them to seek better alternatives abroad, analysts say.

When they do, you may encounter Mexico as an attractive investment. Its strong growth profile, the product of their close economic relations with the United States, and its stable policy stance offer an attractive alternative to Brazil, which is battling accelerating inflation with a combination of unpredictable policies, said Tony Volpon , director of emerging markets research at Nomura Securities in the Americas.

"We are ... talking to our investors in Japan, we are telling them to look to Mexico as a source of investment," said Volpon. "If you look at Brazil, where it is going most of the money, there is much uncertainty over policy. Clearly it is an economy that is overheating.

Customers are beginning to listen, he said.

"We are seeing an increasing flow into Mexico; still very small, but is one of the things that are growing very quickly," Volpon said. In recent months, Japanese retail customers have increased their investments in dollars, mainly through investment trusts denominated in foreign currencies, or Ogre, and through the purchase of debt rated investment grade local currency denominated .

may Japanese institutional investors are also considering the U.S. southern neighbor. Due to the higher returns of the peso against the dollar and its potential to appreciate further, Japanese institutional investors look to Mexico as a "second chance" in the region, Murata said Brown Brothers Harriman.

In the first three quarters of 2010, the balance of payments of Japan for financial accounts showed a net outflow of money of 872,900 million yen from Japan to Mexico, compared to 127,400 million yen net entered Japan from Mexico the same period in 2009, according to Murata.

In particular, Japanese life insurers, that the main nine companies have approximately 150 trillion yen in assets under management, said they will increase their investments in Mexican bonds, said a person from a major Japanese bank.

However, some analysts point out that the current momentum of the trend is still nothing compared to Japanese investments in Mexico prior to the financial crisis.

Lee Hardman, an economist specializing in the exchange rate of Bank of Tokyo Mitsubishi UFJ in London, said he has yet to see a significant increase in demand for the Mexican currency by Japanese investors.

According

that monitors flow, the value of assets denominated in Mexican pesos held in publicly offered investment trusts in Japan actually fell about 15% in February 2011 compared to the same month of 2010, Hardman said.

But there are small signs of life in the issuance of bonds denominated in pesos Uridashi, which are foreign currency debt sold to Japanese retail investors.

Uridashi issuance of peso totaled 1,300 million yen from November 2010 to March this year, compared with no emissions during the previous 12 months, although still much lower than the pre-crisis levels, Hardman said. In March, those numbers could display again some interruptions due to the earthquake but in general, investment managers foresee a growing Japanese interest in Mexico to the extent that the willingness of investors to the United States, its powerful neighbor, it remains relatively positive .

"If you do not like the U.S., never will like Mexico," said Nomura Volpon.