* Yen weakest G10 currency this month despite globalturbulence
* Investors doubt BOJ can reduce stimulus aggressively
* Japanese purchases of foreign equities highest in nearly 3years
* Bond investors growing reluctant to hedge foreign holdings
* Japanese firms spend record sum on foreign acquisitions inH1
By Tom Finn and Hideyuki Sano
LONDON/TOKYO, July 24 (Reuters) - The trade is familiar toinvestors worldwide: in times of turmoil, rush for cover bybuying the Japanese yen.
This year a global trade row has erupted, Donald Trump haslamented the dollar's strength - ignoring a custom that U.S.presidents avoid openly interfering in financial markets - andthe Chinese yuan has tumbled.
And yet the yen has stayed resolutely weak, becoming theweakest of the G10 developed market currencies this month.
The yen's safe-haven status is not in doubt, underpinned byJapan's nearly two trillion yen ($18 billion) monthly tradesurplus. But without a massive world market shock to discourageJapanese investors from buying foreign assets, the yen is likelyto stay weak - above all because the Bank of Japan lags behindits central bank peers in ending monetary stimulus.
Investors doubt the BOJ can aggressively reduce the stimulusmeasures as inflation remains well below target and corporateprofits are recovering slowly.
The BOJ is debating policy changes to make its stimulus"more sustainable", sources told Reuters, but this pushed theyen up only briefly on Monday.
"The Bank of Japan is still pursuing easing which is stillprompting domestic investors to borrow yen and buy overseasassets," said Anton Eser, CIO at Legal and General InvestmentManagement which manages 983 billion pounds ($1.29 trillion) inassets.
While U.S. interest rates have risen seven times since 2016and the European Central Bank plans to wind down its bondpurchases by end-2018, the BOJ is still buying local securities,albeit at a slower pace.
Japanese investors are therefore likely to keep pouringmoney into foreign assets, despite global market wobbles.
Their net purchases of foreign equities reached 1.5 trillionyen in June, the highest in nearly three years. Even as thetrade row deepened, they bought 371 billion yen of overseasstocks during the first week of July.
HEDGE TRIMMING
However, Japanese funds are growing reluctant to hedgeexposure to billions of dollars' of U.S. assets.
"I suspect some investors are reducing currency hedge ontheir foreign bond investments," a senior trader at a majorJapanese bank in Tokyo told Reuters, requesting anonymity.
Japanese fund managers buying 10-year U.S. Treasuries on afully hedged basis now earn a slim 33 basis points in yield,compared with 50-80 bps last year. As the Federal Reserve keepsraising interest rates, even that yield advantage could vanish.
And a lack of demand for yen from investors in the currencyforwards market would feed into falling spot market demand.
"Currency hedging costs have risen rapidly. Japaneseinvestors have stopped hedging. That stops them buying the yen.The flow is for selling yen," said Adam Cole, chief currencystrategist at RBC in London.
Another source of yen selling is Japanese companies makingacquisitions overseas due to lacklustre economic growth and ashrinking population at home. Thomson Reuters data showsJapanese investors spent a record 13.0 trillion yen on foreignacquisitions in the first half of the year.
These included Takeda Pharmaceutical's $62 billionacquisition of London-listed drugmaker Shire Plc.
Initially the deal helped to push the British pound up morethan four percent against the yen in early-April, but in Maytraders started to buy dollars on news that Takeda's payment toShire shareholders would be in dollars.
TRADE WINDS
Trade conflict would seem yen-positive by raising globalmarket volatility. In fact, this is helping to push it down.
Japan is vulnerable to a trade war. Autos, for instance,comprise almost 30 percent of its exports to the United Statesand new U.S. tariffs could hurt Tokyo's vaunted trade surplus.
Also, as fund managers worldwide cut foreign investmentholdings, much of this cash is going to U.S. markets instead ofthe "safe havens". The dollar is likely to benefit from a tradewar due to the United States' lower reliance on exports.
"Rather than move into the Swiss franc or the Japanese yen,the widening interest rate differential in favour of the U.S.dollar is currently providing investors with a strongalternative," Rabobank currency strategist Jane Foley said.
Global investors now hold their biggest overweight positionin U.S. equities in 17 months, Bank of America Merrill Lynch'spoll showed last week. Other equity holdings have fallen andallocations to Japan slid for the third time in four months.
Correlation has been high this year between Japanese stocksand the yen, with both losing ground, BAML's FX strategist KamalSharma noted. That's unusual because yen weakness usually booststhe Nikkei average.
"If U.S. share markets crumbled, then we would be in adifferent situation," the Tokyo-based trader said. "But as longas Wall Street is in the risk-on mode, the dollar will besupported against the yen."($1 = 111.2400 yen)($1 = 0.7629 pounds)
(Additional reporting by Shinji Kitamura and Tommy Wilkes;Graphic by Ritvik Carvalho; Writing by Saikat Chatterjee;Editing by Sujata Rao and David Stamp)
