Japan’s ETFs are starting to ride the ‘Abenomics’ wave

15 July 2014   Category: News, Asia, Global, Japan   By Maya Ando

Following 20 years of economic stagnation, the so-called “three arrows” of Japanese Prime Minister Shinzo Abe’s recovery plan appear to have so far hit their targets. The country, which is notoriously stubborn when it comes to change, last year saw its stock market roar back into life following massive monetary easing and other fiscal stimuli.

The ‘Abenomics’ party also appears to have reached the country’s ETF market. On June 19, the Nikkei 225 Exchange Traded Fund hit 2.16 trillion yen (US$21.28 billion) in assets, raising 445.5 billion yen in the year up to May – the best growth rate among 119 Japan-domiciled ETFs. Since its launch in July 2001, the fund has attracted both institutional and retail investors aiming for portfolio diversification in corporates, including blue chips Fast Retailing, SoftBank, Fanuc, KDDI and Kyocera. The ETF’s performance is all the more impressive when you take into account that companies like Fast Retailing, the operator of fashion retailer UNIQLO, suffered market turbulence of as much as 10% in its stock price during the period. As of December last year, the value of trade on Japan’s ETF market totalled 23.46 trillion yen, which was 5.3 times higher than the previous year. Trading value in the ETF/ETN market in May 2014 stood at about 1.75 trillion yen, with daily average trading value reaching 87.8 billion yen. 

Renewed appetite among investors for ETF products was perhaps best expressed by one curious trend in May, which saw increasing allocations to India via purchases of Nomura Asset Management’s NEXT FUNDS CNX Nifty Linked ETF. The product, which tracks 50 equities listed on India’s National Stock Exchange, saw its trading value grow by ten-fold amid renewed optimism following the election of Narendra Modi. 

Top of the pile, however, was Nomura’s NEXT FUNDS Nikkei 225 Leveraged Index ETF, with around 1 trillion yen in trading value. 

In comparison to the dramatic revival in equity values, the growth in Japanese ETFs could be characterised as mild; but they have been slowly establishing their market size, gaining cachet as Asia’s biggest, and the world’s fourth biggest market after the US and UK. 

However, Japanese ETF managers are increasingly envious of the amount of attention being paid to recovering equity markets, especially on the domestic side. With the introduction of the Nippon Individual Savings Account (NISA), the new tax exemption scheme for retail investors, ETF managers had hoped to see more capital inflow into ETF products. NISA investors, though, have put heavier weighting into mutual funds. By the end of March, about 6.5 million accounts had been opened at security houses, with approximately 1.34 trillion yen invested, according to a report by the Financial Services Agency in June. Among investment products, the volume of capital directed to mutual funds was the heaviest by far, with about 620 billion yen invested, and a total of 364 billion yen allocated to equities. NISA account holders invested a comparatively paltry 910 million yen into ETFs. 

Nikko Asset Management’s head of ETF centre, Koei Imai, says that ETFs are low cost and efficient products in terms of generating returns, and offer transparency by tracking indices. 

Almost 50% of Japan’s ETF investors are overseas asset holders, as local investors, especially larger ones, tend to invest in major, US-domiciled ETFs with high liquidity. For instance, the SPDR S&P 500, which has US$160 billion in AUM, is about eight times larger than Japan’s Nikkei 225 ETF. Given the fund’s size and liquidity, it is understandable that it attracts the attention of Japanese investors. But Mr. Imai points out that investors also need to know the pros and cons, such as tax issues, when investing overseas. 

While about half of the Japanese ETF market is controlled by overseas investors, around 30% of ETF investors are retail. Domestic institutional investors and other brokerage accounts only amount to about a 10% share. 

Ryota Kimura, senior vice president of transaction products division, Tokyo Stock Exchange, comments: “ETFs require market participants to make the market. And a lot of these market makers are actually located overseas, so they are making the market outside of Japan by tracing orders through the network system. That is why half of the Japanese ETF market is dominated by foreign investors.” He sees more growth potential in the domestic ETF market if and when the number of retail investors increases. 

Atsuo Urakabe, senior researcher in the financial IT innovation department at Nomura Research Institute, points out that ETFs are not considered to be a long-term asset by retail investors in Japan. With this in mind, product line-ups should be broadened to accommodate funds that fit long-term asset management strategies.