Yen losing its only friend - the fear of risk

By Chikako Mogi

TOKYO (Reuters) - Ever since the credit crisis erupted nearly a year ago, it has been a familiar pattern: when stocks start to slide, investors dump risky positions, carry trades are unwound and the yen surges higher.

But that pattern is breaking down thanks to the incessant demand for higher-yielding currencies from Japan's institutional investors, retirees and company workers who see every yen surge as another opportunity to sell their native currency.

The latest evidence of this came last month. The U.S. dollar, the Australian dollar and other major currencies all rose against the yen even though major equity markets tumbled between 6 percent and 10 percent.

For that reason, the correlation between dollar daily moves against the yen and the Nikkei share average, which had been highly positive during most of the credit crisis, turned negative.

Since bouts of risk aversion had been one of the few friends helping support the yen, analysts said the Japanese currency will now have a tough time climbing higher.

Favoured currencies like the Australian dollar should push back towards the 17-year highs struck against the yen last year.

"Risk aversion is the only incentive that can be of advantage to the yen," said Masafumi Yamamoto, head of foreign exchange strategy for Japan at the Royal Bank of Scotland.

"Japanese retail investors are not necessarily worried about economic fundamentals. They tend to focus on the level of interest rates," Yamamoto said, pointing to the popularity of the South African rand, which is backed by a 12-percent interest rate.