Mr. and Mrs. Watanabe Seen Souring on Turkey by MUFJ Kokusai

(Bloomberg) -- Japanese retail investors’ passion for the Turkish lira reached fever pitch at the start of October, but will that ardor be doused by the latest political fracas?

Yes, according to Mitsubishi UFJ Kokusai Asset Management Co.

While Turkey’s 10 percent-plus yields across the bond curve helped lure Japan’s notoriously yield hungry individual investors to the market, the latest turn in sentiment -- triggered by the U.S. and Turkey both suspending visa services -- may have a longer-term effect on demand, says Hideo Shimomura, chief fund manager at MUFJ Kokusai, which oversees about $112 billion.

The lira tumbled with stocks and bonds in Turkey Monday as the tensions added to concerns about the country’s twin deficits and the outlook for further U.S. monetary tightening. Japanese retail investors’ net long lira positions surged to a record in the week to Oct. 3.

“A lot of funds have gone into the short-term debt market, so initial reaction to any headlines tends to be quite significant,” Tokyo-based Shimomura said. “With the latest development, Turkey now has tension with Germany and the U.S. and investors will pay closer attention to the nation’s diplomatic issues from now on.”

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net.

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Emma O'Brien