THE wide gap between Japan’s interest rates and those of Brazil’s has attracted investors to the yen carry-trade for Brazilian assets in spite of emerging market risks.

    Borrowing cheap yen to fund purchases of Brazilian stocks and bonds has proven a winning strategy so far this year. Some analysts, however, think investor sentiment could cool with Brazil’s interest rates not expected to rise further and on potential political risks.

    The Bank of Japan’s massive monetary stimulus unfurled 13 months ago has kept Japanese rates at rock-bottom levels, in sharp contrast with Brazil’s 11 percent benchmark.

    With most other major currencies such as the dollar and the euro offering yields only slightly better than the yen, retail and institutional investors are looking to higher-yielding emerging markets. The feel-good factor of the forthcoming World Cup is also giving sentiment towards Brazil a boost.

    “With all the hype of the World Cup, the overall sentiment is one of buoyancy,” said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo. “There’s still reason to like the long-Brazil trade.”

    Although a slowing Brazilian economy dented Japanese appetite for the real in 2012-13, the real became popular again after the Brazilian central bank raised its benchmark Selic by a total of 3.75 percentage points in nine straight increases since April 2013. But with the country’s inflation rate rising less than expected in April, expectations are growing the central bank will pause its monetary tightening cycle.

    BRL-denominated uridashi — bonds targeted at Japanese retail investors — rose sharply this year as a percentage of emerging market issuance.

    (SD-Agencies)