NEW YORK, 11 September 2006 — Speculators may have ramped up their bets against the yen to record highs, but some long-term investors see a hefty drop in the Japanese currency as an opportunity to buy on the cheap.

Hedge funds and other speculators have helped dump the yen to a record low against the euro and eight-year troughs against the Swiss franc and sterling this month, but some portfolio managers have been quietly betting against the trend.

Strong Japanese fundamentals and the prospect of a stronger Chinese yuan as China lets its currency rise more freely are amongst the reasons. “Medium-term, we think the yen has to rise on back of the fact that the Japanese economy is recovering, yields are rising, and China will have continue to revalue,” says Dilip Rasgotra, global head of fixed income and currency research for Credit Suisse Asset Management (CSAM) in London.

Certainly, many big investment banks have been bullish on the yen for years, only to see their predictions fail to materialize as the Japanese currency weakened further. But CSAM, which manages around $400 billion of assets for its clients, is putting its money on the line, Ragostra said.

It has pared some of the currency hedges it uses to insure its portfolio against the risk of a weaker yen versus the euro, even as the euro shot to a record high of 150.73 yen last week and has gained more than 6 percent this year. “We think between 150-155 is really the top end of the range,” said Rasgotra. “If it were to reverse we could easily see somewhere in the range of 120-125 medium term.”

Although many global portfolio managers do not hedge their exposure to the yen, some use options or forward contracts to lock in exchange rates and prevent big swings in currencies from affecting the value of their portfolios.

Foreign funds have been big buyers of Japanese equities in recent years, helping the benchmark Nikkei index rise 114 percent from a two-decade low in 2003. Foreigners bought more than 10 trillion yen of Japanese stocks last year, the highest on record.

Despite such buying, the yen has been weak, partly since foreign purchases of Japanese stocks have been outweighed by Japanese investors selling yen to buy higher-yielding debt in everything from the New Zealand dollar to sterling.

“We think the yen is extremely cheap, maybe something like 30-40 percent undervalued against the pound and euro, and 20 percent versus the dollar,” said Roddy Macpherson, investment director of global strategy at the UK-based Scottish Widows’ Investment Partnership, which has 100 billion pounds of funds. “We are certainly of a mind to buy, and we are long yen.”

San Mateo, California based fund manager Franklin Templeton Investments is also upbeat on the yen’s outlook. The company’s Templeton Global Bond Fund has an exposure of 12.6 percent to the Japanese currency, up from zero just a year ago.

Signs of rising prices, strong domestic demand and an upbeat outlook for capital spending in Japan all point to a stronger yen against the dollar in the medium term, said Michael Hasenstab, manager of the $2.6 billion fund.

There are already signs of a turnaround. The euro dropped almost two full yen on Thursday after a German deputy finance minister said the yen’s weakness would be discussed at a meeting of Group of Seven finance ministers this month.

Many analysts also cite signs that China is looking to allow its tightly controlled yuan to rise more as a reason to be bullish on the yen. The more-liquid yen is often traded as a proxy for the Chinese currency because Japan and China have close trade ties.

Not everyone is as upbeat on the yen. Robert McKillop, who helps manage around $3 billion of Japanese stocks for Standard Life Investments in Edinburgh, is bullish on Japan in the long term but concerned about the effects of a US economic slump. “Japan is still a cyclical economy, and one of the big drivers of that cyclicality is external demand,” he said.

“If the US is on the cusp of a consumer-led slowdown, then that makes yen assets less attractive.”

Rock-bottom Japanese interest rates have long been the yen’s Achilles heel. Despite the Bank of Japan’s first rate increase in six years in July, Japanese overnight rates remain 5 percentage points below those in the United States and a whopping 7 percentage points below New Zealand’s.