Record inflows for Japan equity funds

Investors have poured cash into exchange-traded funds that buy Japanese equities in the past week, even as the Tokyo stock market tumbled.

Analysts were divided on whether the inflows pointed to evidence of contrarian bets on Japanese stocks recovering or short selling in the market.

According to data from Lipper, US-based mutual and exchange-traded funds that invest in Japanese stocks saw record inflows of $956m in the week ending Wednesday.

But nearly all the money, or $861m, went to the iShares MSCI Japan Index Fund, the largest Japan-related ETF in the US and UK. Mutual funds that buy Japanese equities saw only modest inflows.

The weekly inflows “underscore the importance that ETFs play in rapidly trading markets”, said Jeff Tjornehoj, head of Lipper Americas research at Thomson Reuters.

“ETFs provide liquidity and they are readily available to traders of all sizes; This trade probably included everyone from hedge funds to individual investors who thought they would play the role of contrarian for a day.”

On Tuesday, there was a record inflow of $650m into the iShares MSCI Japan ETF, said BlackRock, which owns the fund.

The iShares MSCI Japan index fund fell 14.3 per cent in the week ended Wednesday, the same period as the fund flow data. The top holdings as of the end of February included Toyota, Sony and Tokyo Electric Power, which owns the nuclear plant whose damage has raised concern about the release of radiation. Some analysts were beginning to see bargains after this week’s drop in share prices.

“Valuations are beginning to look attractive,” said Dylan Grice, strategist at Société Générale. “While I worry that JGBs [Japanese government bonds] are over-owned within the financial system, the flipside is that Japanese equities are massively under-owned. Japanese stocks are starting to look attractive.”

Rival fund tracker EPFR Global, which follows funds domiciled globally, reported large inflows into Japanese ETFs but also redemptions of $850m from non-ETF mutual funds. That was the largest outflow in more than 17 months.

“This activity [inflows to ETFs] may be due to short positions,” said Brad Durham, managing director at EPFR, who said new ETF shares need to be created to generate short positions and those new shares are reported as inflows.