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Move over, Brazil. Japanese investors, who have long favored the Brazilian real for its high yields, may be looking at the Mexican peso as a second chance at earnings in Latin America.
Until now, the ongoing appreciation of the real--plus its high yields compared to the dollar--has made it a favorite investment destination for investors from the world's third-largest economy, said Masashi Murata, foreign exchange vice president at Brown Brothers Harriman in Tokyo.

The real's appreciation, however, is starting to lead Japan's investment community to eye assets elsewhere in Latin America, with the Mexican peso-based investments looking the most promising. Flows could yet be disrupted by transfers tied to the recent earthquake, which has prompted Japanese individuals and insurance companies to repatriate money held abroad to help pay for restoration costs. But Japan's prodigious savers still have much money to put to work, and the low-yields on offer in Japan will continue to push them in search of better deals abroad, analysts say.

When they do so, they may well find Mexico an attractive investment. Its solid growth profile, stemming from its close economic ties with the U.S., and its stable policy stance offer an appealing alternative to Brazil, which is fighting accelerating inflation with an unpredictable policy mix, said Tony Volpon, head of emerging-market research Americas at Nomura Securities.

"We are...talking to our investors in Japan--we keep telling them to look at Mexico as an investment source," Volpon said. "You look at Brazil, where most of the money is going--there's a lot of policy uncertainty. It's clearly an economy that is overheating."

Clients are beginning to listen, he said.

"We are seeing a rising flow into Mexico; it's still very small, but it's one of the things that is growing very rapidly," Volpon added. Within the last few months, his Japanese retail clients have increased their investments in the pesos, primarily through foreign-currency-denominated investment trusts, or Toshin, and by buying local-currency, investment-grade debt.

Japanese institutional investors may also be eyeing the U.S.'s southern neighbor. With the peso's higher yields against the dollar and its potential to appreciate further, Japanese institutional investors view Mexico "as a second chance" within the region, said Brown Brothers Harriman's Murata.

For the first three quarters of 2010, Japan's balance of payments for financial accounts showed net outflows of JPY872.9 billion from Japan to Mexico, compared with JPY127.4 billion in net inflows into Japan from Mexico for the same period in 2009, according to Murata.

In particular, Japanese life insurers--who have roughly 150 trillion Japanese yen in assets under management among the nine major companies--have indicated that they will increase their investments in Mexican bonds, said one person at a major Japanese bank.

But some analysts note that the trend's current momentum still doesn't compare to Japanese investment in Mexico before the financial crisis.

Lee Hardman, currency economist at Bank of Tokyo Mitsubishi UFJ in London, said he has yet to see a significant pickup in demand for Mexico's currency from Japanese investors.