Japan shares lose allure as volatility, correlation rise

Tue Dec 15, 2015 4:07pm EST
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By Hideyuki Sano and Tomo Uetake

TOKYO (Reuters) - Some long-term foreign funds are cutting exposure to Japanese stocks due to rising volatility and a high correlation to other markets that has made them less useful as a hedge to investors.

The more pessimistic view of Japan's stock market, revived by a run of poor economic data, has raised questions about the sustainability of a three-year long rally fueled by the stimulative effects of loose monetary policy or Abenomics.

"Macro drivers such as hopes of additional easing by the Bank of Japan and further depreciation of the yen, have become much weaker," said Yasuo Sakuma, portfolio manager at Bayview Asset Management in Tokyo. "Foreign investors could become net sellers of Japan stocks on an annual basis for the first time since 2008."

Japanese share prices have slumped since China's central bank devalued the yuan in mid-August, sparking fears of a hard landing in Japan's largest trading partner.

Two major European pension funds pulled money from asset managers they had mandated to manage Japanese stocks after the market turmoil in late August, asset firm executives told Reuters in recent interviews.

"The performance of our fund was pretty good. But we were told that they think the market's volatility is too high," said an official from an asset management firm with a mandate from a pension fund in Europe. The manager declined to be identified as he was not authorised to discuss investor contracts.

While the move by China rattled markets around the globe, a big rise in Japan stock market volatility has spooked investors.

The 60-day volatility of Topix .TOPX, the Tokyo Stock Exchange's benchmark index, shot up to 31 percent in late September, from around 13 percent at the end of June.   Continued...

Pedestrians are reflected in an electronic board showing the graph of the recent fluctuations of  the Tokyo Stock Exchange Stock Price Index (TOPIX) outside a brokerage in Tokyo, Japan, May 28, 2015. REUTERS/Yuya Shino