By Sujata Rao
LONDON, Aug 21 (Reuters) - Large-scale redemptions of rand-denominated bonds sold to Japanese investors could mean a volatile autumn for South Africa's currency, and may have implications for other emerging markets that find favour with Japan's bond buyers.
The view that developing nations are likely to emerge from the global crisis more quickly than most developed economies has stirred the interest of Japan's mom-and-pop investors, who have for years been a potent force on global markets.
Their purchases of so-called "uridashi" bonds, high-yield issues denominated in foreign currency and sold to Japanese retail investors, have in the past been a moving force behind the New Zealand and Australian dollars.
Now Japan's yield-chasing individual investors, estimated to hold over 1,400 trillion yen ($14.9 trillion) in savings, are increasingly looking to emerging market currencies for uridashis.
So these markets, starting with South Africa, could see their already-high volatility increase further in coming years.
Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ, says uridashi redemptions in the second half of this year could trigger a rand sell-off versus the yen, especially in November, when 3.5 billion rand of bonds are due to mature.
A total of 10.9 billion rand is up for redemption this year, she estimates, and 21 billion rand in 2010. Unless this debt is rolled over via fresh issuance, the rand could pay the price as investors convert their money back into yen. "Uridashi expiries are a relatively minor issue for the Australian dollar, whose capital markets are deeper and less volatile than New Zealand's or South Africa's," Fink said.
"But kiwi and rand uridashi redemptions have the possibility of spurring larger currency moves."
SURGE IN ISSUANCE
Uridashi issuance in rand surged from 2006, thanks to South Africa's high interest rates and currency markets that are more deep and liquid than those of most developing nations.
Data compiled by Reuters shows at least 10 billion rand ($1.3 billion) in uridashis were sold in the first half of 2009, though this does not include private placements. That outstrips New Zealand dollar issuance of NZ$1.6 billion ($1.1 billion).
Some analysts link these flows to the rand's rapid appreciation in the first half of 2009 -- it was the world's best-performing emerging market currency, with 20 percent-plus gains against the dollar and the yen.
But uridashi issuance has now slowed, coinciding with a weaker rand which is down almost one percent versus the dollar since end-June and about three percent lower against the yen.
About 650 million rand of uridashis were issued in July, about a third of March levels, the Reuters data shows.
Some analysts believe the rand will not suffer too much this time, thanks to South Africa's 7 percent repo rate. Compare that with the 0.1 percent available on bank deposits in Japan, or even the roughly 2.5 percent offered by that old favourite, the New Zealand dollar.
"We don't see much risk to the exchange rate -- they have a high short-term interest rate, which is attractive in a world where rates in many countries are negative," said Donald Egginton, economist at Daiwa SMBC in London.
"This suggests there will not be a problem i.e. a lot of (the bonds) should get rolled over."
NEW ZEALAND DOLLAR
But the experience of the New Zealand dollar suggests the rand could become vulnerable.
The kiwi, one of the eight most-traded currencies in the world, has frequently been hostage in the past to uridashi issues and redemptions, its gyrations reflecting retail investors' power to determine its fortunes.
Having hit a post-float high versus the U.S. dollar last March, when the key New Zealand interest rate was at a lofty 8.25 percent, the kiwi was hit hard late last year by fears that uridashi holders would spurn falling yields and repatriate their investments.
Over NZ$8 billion in uridashis are due to mature this year, about seven times the amount newly issued so far this year.
Bhanu Baweja, head of emerging currency and fixed income strategy at UBS, says Japanese interest in emerging markets is rising not only because of yield differentials, but also as market liquidity and fundamentals in those countries improve.
Reuters data shows a small but steady trickle of issuance in Turkish lira and Brazilian real in addition to the rand.
"Uridashi is not a deal-breaker in terms of flow for emerging currencies just yet, though it will become that in the next three to five years," Baweja said.
"At present the impact is marginal -- maybe about 5 percent...But I expect more uridashi issuance in those emerging currencies that still offer carry." ($1 = 93.91 yen) (Editing by Andrew Torchia)