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Stocks

US funds wielding 'whale' power

TOKYO -- Exchange-traded funds listed in the U.S. are helping to power Japan's stock market.

     Japanese shares have been a popular choice for foreign investors of late. According to the Finance Ministry, purchases originating overseas outstripped sales by 3.5 trillion yen ($28.9 billion) in the period from March 29 to April 25. 

     What we are seeing is a "third wave" of investment in the Japanese market, following one in early 2013, when Prime Minister Shinzo Abe formed his second government, and another last autumn, when Bank of Japan Gov. Haruhiko Kuroda launched a surprise round of monetary easing.

     ETFs that focus on the Japanese market are feeding the latest wave. The BlackRock-sponsored iShares MSCI Japan fund and WisdomTree Investments' WisdomTree Japan Hedged Equity Fund are performing particularly well. Recently, aggregate inflows to the two funds have averaged $420 million per week.

     That influx of cash and the surge in the Japanese stock market have combined to raise the two funds' aggregate net asset value to $35 billion.

     The amount pales in comparison to the equity holdings of, say, Nippon Life Insurance, which is estimated to own around $66.2 billion worth. Nevertheless, the ETFs are clearly significant forces in the market. Some players call the funds, together, "another whale" -- using the nickname for Japan's massive Government Pension Investment Fund.

Currency stability

The WisdomTree and iShares funds both invest in Japanese equities, but their strategies differ. The former is currency-hedged, the latter is not. The WisdomTree fund offsets exposure to currency fluctuations by taking yen-short, dollar-long positions. Investors who expect higher stock prices and a stronger yen would invest in iShares, while those who foresee a weaker yen would buy into WisdomTree.

     Since U.S. investors' forecasts have been divided lately, the two funds are chasing each other.

     Equity-linked currency transactions may be one of the reasons the yen has been hovering around 120 to the dollar. This is good news for both the U.S. and Japanese governments. As the Trans-Pacific Partnership trade negotiations are now at a critical stage, further yen depreciation against the dollar might fuel anti-TPP protests in the U.S. Congress. On the other hand, a stronger yen could hurt Japanese exporters and drag on stock prices.

     The moderate rate of around 120 yen per dollar is seen as "comfortable" for both sides.

     Abe's recent visit to the U.S., where he sought to raise awareness of Japan and strengthen ties with President Barack Obama, may draw still more American money to the Japanese stock market. 

     Japanese stocks did slump last week. If these U.S. funds really amount to "another whale," they will help to shore up the market.   

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