TOKYO (Reuters) - Yield-hungry investors have been betting that Japanese real estate investment trusts will pay off as asset prices rise and interest rates remain stable, with the instruments growing in popularity among both retail and institutional investors.

The Tokyo Stock Exchange Reit Index pushed to 13-month highs this month, and has risen around 3 per cent so far this year, helped by the introduction in January of the Nippon Individual Savings Account (NISA).

The tax-break facility was set up to give Japanese retail investors incentive to move their funds to other assets from historically low-earning saving accounts, whose cash value erodes as the Bank of Japan slowly moves closer to meeting its 2 per cent inflation target.

"People have started realising inflation is really coming,"said Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas in Tokyo, to explain Reits' appeal. "I think it's an inflation hedge," he said. "This kind of fear is pushing some money into higher-yielding assets instead of just bank deposits."

Listed Reits are similar to stock mutual funds in that they are shares of a portfolio of properties and trade on exchanges, with dividend yields derived from the rental income. Reits are somewhere between stocks and bonds in terms of risk/reward metrics.

The Reit index's return of 3.8 per cent based on forward dividend projections dwarfs the 10-year Japanese government bond (JGB) yield, which trades around 0.60 per cent. It is also solidly above the U.S. benchmark 10-year yield, which closed at 2.64 per cent in US trading on Wednesday.

Strategists at Nomura put their upside target for TSE Reit Index at 1,750, compared to its current level around 1,550.

"When you compare Reits' yields with long-term government bond yields, it is obvious which is more attractive," Takatoshi Itoshima, chief portfolio manager at Commons Asset Management."So if long-term yields start rising, Reits will become less attractive."