For Wall Street, the City of London and the traders in Hong KongÆs Exchange Square, the fallout from AmericaÆs subprime mess has led to a crisis of confidence that has frozen liquidity in the worldÆs banking system. Value-at-risk protocols, fund redemptions and margin calls have forced hedge funds and other investors to cut their most liquid investments. Their first stop has been in the yen carry trade.

The ôkimono traderö has also been hit by margin calls. JapanÆs often-highly leveraged housewife speculators have been forced to liquidate their end of the yen carry trade. The feared demise of this trade, which has given so many hedge funds and other investors low-cost borrowing in Japanese yen that could be employed in high-yielding assets (lately Australian government bonds, for instance), has fuelled the panic in the global money markets.

Japan is the worldÆs largest creditor nation. If Japanese investors stop allocating assets into foreign asset classes at a time of a liquidity crunch, then the subprime crisis could escalate.

For now, however, portfolio managers and fund house executives in Tokyo are sanguine that these flows may pause but wonÆt retreat.

This is because whatever trends are driving the yenÆs appreciation and the volatility in global credit, these will be trumped by an even bigger trend: the shift by the Japanese from savings to investment. This year has seen the start of a three-year trend of baby boomers retiring, and comes after a wrenching restructuring of corporate pensions toward more conservative, low-risk allocations.

The result is that people will on average live another 20 years post retirement but lack the money to finance it. With domestic interest rates still very low (the Bank of JapanÆs overnight call rate is 50 basis points and the 10-year government bond yields around 2.2%) and the domestic equity market failing to ignite, there is a huge trend of people shifting money out of bank deposits and postal savings accounts into funds, particularly global diversified income products.

ôThe trend of investing abroad wonÆt change in the immediate future,ö says Junichi Narikawa, deputy general manager of the fixed income division at Mitsubishi UFJ Trust & Banking. ôForeign investments will not flow back to Japanese society for another five or 10 years.ö

Nor is the appreciating yen a major impediment, says Yasuhiro Ohkubo, CIO at Resona Trust & Banking. This is partly because the interest-rate differentials remain large, and also because many investors donÆt take currency into consideration.

While margin calls have tugged the skirts of many kimono traders, institutional investors remain pretty relaxed. For example, Shinichi Aizawa, general manager of investment planning at Daiichi Mutual Life Insurance, says the $258 billion institution has set long-range asset allocations. Its subprime exposures via hedge funds and CDOs are minimal and it sees no need to change its overseas allocations.

ôInstitutional investors are accustomed to volatility and arenÆt going to change their investment behaviour,ö says Yoshihiko Kaku, general manager of the fixed income investment department at Mitsui Asset Trust & Banking.

Fund houses say they donÆt see investors retreating from overseas allocations. There has been profit-taking in high-performing funds that invest in Australian or New Zealand bonds, says Yasushi Muramatsu, executive officer and head of fixed income management at DaiwaSB Investments. But then the Australian dollar staged a comeback following a rise in interest rates by the Reserve Bank of Australia. ôNow our customers are net buyers again,ö he says. ôThe Australian dollar/yen exchange rate may not fully recover, but Japanese will continue to support high-yielding currency investments.ö

Some fund executives are even hoping the latest bout of volatility will help their business. ôJapanese investors will continue to invest in overseas equity,ö says Kazuhiro Honjo, chief fund manager at Tokio Marine Asset Management. ôIf there is more volatility, there may be more preference for active managers.ö