Ibbotson Associates Japan Katsunari Yamaguchi: Liquidity risk is a concern for Japan ETF market

Exchange Traded Funds (ETFs) are still new in Asia, even to advanced economies like Japan, judging by the number of listings and trading volume. Liquidity is one of the major risks when investing in ETFs in Japan, but it is believed that liquidity can be build up over time.

Jessie Yung 14.10.2011
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Exchange Traded Funds (ETFs) are still new in Asia, even to advanced economies like Japan, judging by the number of listings and trading volume. We are pleased to have Katsunari Yamaguchi, President of Ibbotson Associates Japan, to share his views on ETF development in Japan.

 

The first ETF in Japan, Nomura Nikkei 300 ETF, was listed on Tokyo Stock Exchange (TSE) in 1995, only to be followed by another listing some six years later.  With the onset of the “baby boom” in 2008, there are now over 100 ETFs trading on TSE, the highest number of listings in Asia but trading remains thin. Historical data provided by TSE indicates that the turnover value of ETFs accounts for less than 1% of stocks traded on its first, second and Mothers section.

 

One step at a time to access emerging markets

 

Yamaguchi agrees that liquidity is one of the major risks when investing in ETFs in Japan, but he believes liquidity can be build up over time. ETFs are valuable portfolio diversifiers in his opinion. “Investors should allocate a small part of their portfolio to ETFs,” Yamaguchi suggested, “especially for the younger people to gain exposure to the international economy.”

 

Developed markets, like the U.S, are comparatively less volatile and more accessible to investors. Emerging markets are often the opposite, comparably more volatile and less accessible. With the advent of ETFs, small investors can tap this riskier market slice with relative ease for greater potential returns that is underpinned by strong economic growth in terms of GDP per capita and improving underlying fundamentals. Of course, investors should always exercise prudence and take into account their risk appetite when investing in these markets.  

 

Japanese are too conservative for growth?

 

Liquidity risk in ETF investing remains a concern for Japanese investors due to its low turnover, compared to equity investing. “Japanese investors are conservative in general. They are putting their money in bank deposits, looking for stable and visible income streams.” said Yamaguchi. “Other than that, instruments with monthly disbursements, such as foreign bonds or currencies are usually preferred by the Japanese.”

 

The risk-adverse attitude of the Japanese and the payment structure adopted by brokerage firms with regard to ETFs do not prove conducive to its development. Hence, Yamaguchi hopes for a more active promotion for ETF investment and institutional participation to boost liquidity, which he believes should improve if given enough time.


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