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Elderly Japanese immigrants practice exercises during the early morning hours in Liberdade square in Sao Paulo, January 24, 2004. Sao Paulo, the world's biggest Japanese neighborhood outside of Japan, celebrated its 450th birthday anniversary on January 25, 2004.

Paulo Whitaker/Reuters/Paulo Whitaker/Reuters

Japanese retail investors are set to pour $45-billion U.S. into Brazil over the next twelve months, boosting the country's already overvalued currency and putting even more pressure on local exporters, according to investment bank Nomura.

After reaching $30-billion over the past year, investment by Japanese households in Brazil is currently running at $4-billion a month, about as much as total foreign direct investment into the Latin American country.

Brazil has long attracted Japanese investors thanks to its attractively high yields and the strong immigration links between the two countries, but a recent flood of cash is likely to only add to Brazil's currency problems.

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"Japanese households buy a lot of mutual funds and right now the favoured currency of those products is the Brazilian real," said Jens Nordvig, head of G10 currency strategy at Nomura. "They really have a love affair with Brazil."

Japanese retail investments in Brazil now total about $95-billion, according to Nomura, the Japanese investment bank with the biggest presence in Latin America.

Brazil's interest rate, which at 12.25 per cent is one of the highest among large economies, is a key attraction for investors who can borrow at rock-bottom rates at home, such as the Japanese.

The stereotypical "Japanese housewife", or private investor, is also more familiar with Brazil than other emerging markets as a wave of immigration a century ago means Brazil is home to the largest community of Japanese outside Japan.

However, these yield-chasing investors have pushed the Brazilian real to a three-year high against the dollar, making it even more difficult for the country's manufacturers to sell their products abroad and compete with cheap imports.

Siemens , the German industrial group that ranks as Brazil's biggest electronics conglomerate, recently warned of the danger of Brazilian "deindustrialization" as the surging real made it harder to export out of the country.

Brazil is expected to keep increasing interest rates this year as it battles to control inflation, meaning that Japanese retail investment into the country could continue at the same pace "for the next several quarters, if not several years", according to Mr. Nordvig.

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Even the devastating earthquake in March has had little impact on Japanese retail investments, which mainly take the form of currency derivatives or fixed income instruments.

"After the earthquake, people thought investment would drop off, but it seems to be pretty robust," said Doug Smith, regional head of research for Latin America at Standard Chartered Bank.

While Japanese retail investors repatriated some money in the few days after the earthquake, flows to Brazil soon stabilized and were already higher in May than they had been before the disaster, said Nomura's Mr. Nordvig.

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