Expectations of easier monetary policy in Japan, along with a weaker yen, have revived talk of yen-funded carry trades, with investments in some emerging market currencies seen as most attractive. Strategists said the prospect of selling the weak and low-interest rate yen for higher returns elsewhere could provide a final money-making opportunity of 2012 for banks' trading desks and macro funds, which have struggled in an uncertain global environment where few are willing to take on risk.

With depressed interest rates and bleak economic outlooks in many developed countries, investors looking to sell the yen are increasingly focusing on currencies from emerging markets in Asia, Europe and Latin America with higher interest rates, relatively better fiscal positions and robust growth prospects.

The yen shed around 4 percent against the US dollar in the week after November 14, when talk surfaced of an early election in Japan, raising the prospect of a new government pushing the BOJ into easing its ultra-loose monetary policy. The yen's trade-weighted value, an index calculated against a basket of developed and emerging currencies, has fallen to a near eight-month low, data showed. "Using the yen (as a funding currency) has made sense in the last 6-7 months, but the question is, 'What do you buy?'," said Peter Kinsella, FX strategist with Commerzbank.

With volatility subdued, riskier and less liquid emerging market currencies are increasingly targeted by investors as they tentatively return to leveraged carry trades. "With the fall in volatility, conditions are definitely in place for carry to come back, but perhaps in the emerging market space," said Geoff Kendrick, currency analyst at Nomura.

Indeed, while the yen has fallen to its lowest in nearly eight months against the high-yielding Australian dollar and the New Zealand dollar, it hit its weakest in 17 months against the South Korean won. If Japan were to ease policy, yield-hungry Japanese retail investors and asset managers could give such trades a boost. Before the financial crisis, near-zero rates in Japan saw these investors sell the yen to buy the Australian or New Zealand dollar, whose interest rates were around 7 percent.

Both those countries have since slashed rates. Australia's official cash rate stands at 3.25 percent and the central bank is expected to cut in coming months, a factor likely to keep investors away from the Aussie. Morgan Stanley strategists recommend selling the yen against a basket of Chinese yuan, Korean won, Taiwanese dollar and the Singapore dollar.

Copyright Reuters, 2012