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Stocks

Asian hedge funds reawaken to Japanese shares

TOKYO -- Many market observers remain bullish on Japanese stocks despite Thursday's dip in the Tokyo market as Asian hedge funds step up trading.

     The rise of Tokyo shares halted Thursday on news of a stall in Greece bailout talks, with the Nikkei Stock Averge closing 96 points lower at 20,771.

     "Although they are taking a wait-and-see stance today, Asian hedge funds have been getting active lately," says a trader at a major securities brokerage.

     This trader has tracked the Nikkei average's intraday movements. The spread between the intraday high and low was narrow through early June, but now is getting wider. On Tuesday, the gap reached 278 points -- the biggest swing in about a month. More hedge funds are trading to gain from such price fluctuations, the trader reckons.

     Daiju Aoki, a senior economist at UBS Securities who visited Hong Kong and Singapore this week, was showered by questions from hedge fund managers and analysts. "They did not seem to so care much about details but appeared to be looking for reasons to buy Japanese shares now," Aoki said. "They must need rationales to convince their bosses."

     Sell-offs of cross-holdings by Japanese megabanks are also a hot topic among Asian hedge funds. The moves are fueling hopes that the banks will return the proceeds to shareholders. Many are speculating that the Financial Services Agency will introduce a new policy on the matter as early as this summer, reflecting their endless search for incentives to buy.

     Chinese shares had the spotlight as of a few weeks ago, with the linking of the Shanghai and Hong Kong markets providing foreign investors direct access to mainland shares.

     The price discrepancy of stocks listed on both exchanges offers opportunities for arbitrage. Some hedge funds enjoyed high returns by taking advantage of this between January and May. Other investors took notice and moved money from Japanese shares to Chinese stocks.

     But the tide has shifted since the June 19 Shanghai stock plunge, says John Joyce, head of global equity sales at Goldman Sachs Japan. Nearly 1,000 stocks on the Shanghai and Shenzhen markets went limit-down that day.

     Joyce says this is when investors started inquiring about Japanese shares. A full-blown decline by Shanghai stocks would deal a blow to Japanese shares, too. But for the time being, Japanese stocks appear to be perceived as a tool for hedging risk.

     Buyers "haven't lost interest in Chinese shares," noted Masakazu Yanagisawa of Deutsche Securities in Tokyo. Index compiler MSCI demurred from including mainland shares in its emerging-market index in June. But the Chinese government is expected to take steps to improve market access for foreigners so that mainland shares are eventually included, he said.

     Hedge funds likely will weigh reforms on corporate governance in Japan and market access in China in search of even more opportunities.

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