Don't expect yen carry-trade surge after Fed tapering - analysts
* Yield gap between dollar, yen too small to spur carry trades
* Yen not the only currency with zero rates
* Some see chance of yen-carried investments in high-yielding currencies
TOKYO, Sept 18 (Reuters) - As the U.S. Federal Reserve looks set to begin whittling away at its stimulus in a first step towards eventual rate increases, the yen could see renewed interest as a funding currency for investments in higher-yielding currencies.
But any pressure on the yen from so-called carry trades is likely to be moderate compared with in the mid-2000s, when the Japanese currency weakened persistently on such trading, because current yield gaps between the yen and other major currencies remain too small, analysts say.
"Back in 2005-2007, only the yen had exceptionally low interest rates, making it a funding currency of choice," said Tohru Sasaki, head of Japan rates and forex research at JPMorgan Chase Bank. "But now there are other currencies that have low rates, so funding is likely to be more spread out among those currencies."
Analysts expect the Fed to trim its bond buying and forecast U.S. interest rates to rise substantially by the end of 2016 from current near-zero levels after its two-day policy meeting ending on Wednesday.
By contrast, most investors expect the Bank of Japan to adopt more stimulus next year as inflation is likely to undershoot the central bank's forecasts.
Although the difference in policy bias of the two central banks is expected to put some pressure on the yen, that alone is likely not enough for yen-carry trades to flourish given that short-term U.S. Treasury yields remain at historically low levels.
The two-year U.S. note yield hit a two-year high of 0.538 percent earlier this month but has since fallen to 0.375 percent after former Treasury Secretary Lawrence Summers, seen by investors as relatively hawkish, dropped out of the race to head the Fed.
That is well below the more than 4 percent that U.S. two-year notes were yielding in 2005-07, when many market players borrowed the yen at almost zero cost to buy U.S. Treasuries and other higher-yielding assets.
"I think there will be some revival of yen carry-trades. But for that to happen, judging from past experience, the two-year U.S. yield will have to rise beyond 0.8 percent, towards 1 percent," said Sho Aoyama, a senior market analyst at Mizuho Securities. "That may be still some time away."
In addition, the euro may compete with the yen as a funding currency, with the euro zone widely expected to keep de facto zero interest rates for a long time to support the economy after the region's debt crisis.
Some traders say yen-funded carry trades could flourish only against higher-yielding emerging currencies such as the South African rand, the Mexican peso and the Brazilian real, given that they still retain a hefty yield advantage.
Among major currencies, the Australian dollar has retained some attraction as a destination for yen carry trades, with the benchmark cash rate at 2.50 percent, though that is less than half of its levels before the global financial crisis.
(Reporting by Hideyuki Sano; Editing by Chris Gallagher)