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Abenomics invigorates Japanese ETFs

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There are convincing signs, including the recent 18-year high of the Nikkei share index, that Abenomics is reinvigorating the world's third largest economy. The Japanese ETF industry too has enjoyed tremendous growth under Prime Minister Shinzo Abe's economic reforms and now some leading Japanese ETF providers are courting Western investors. 

Nikko Asset Management, one of the pioneers of the ETF business in Japan, launched their first ETF back in 2001. Tokyo-based Koei Imai (pictured), head of the firm's ETF Centre, explains that the Japanese ETF market underwent significant deregulation in 2007 in an effort to encourage greater product innovation. Nikko Asset Management saw this as an opportunity and today the firm is Japan's second-largest ETF provider. 

London-based Geoffrey Post, who is responsible for developing Nikko Asset Management's ETFs in Europe, explains: "As Asia's premier global asset manager our focus is on bringing Asian investment solutions to western investors as well as global investment solutions to Asian investors."

He notes that the firm is differentiated from the majority of large established managers investing in Asian markets, as it is headquartered in Asia and the majority of its investment professionals are based in Asia. The firm manages USD160 billion in total assets1, including USD37 billion of indexed assets. The firm's TOPIX ETF has USD10.5 billion under management while their Nikkei 225 ETF has USD12 billion. 

The ETF range from Nikko Asset Management offers distinct advantages. "We are in a good position to provide products that are run from the local Asian markets," Post says. "There are a number of advantages but in particular people can invest when the local markets are open which provides transparency and efficiency for investors."

There are other advantages to being a local manager with significant assets. "We can invest at a lower cost resulting in superior tracking," Post says. "One of the areas we are proud of is the quality of our ETFs – a low tracking difference is one of the investors' key decision criteria when looking at these products."

One of the developments of Abenomics has been the launch of the Nikkei JPX 400; a new index composed of companies with high appeal for investors and designed to drive change in corporate Japan.

"It is a very interesting story and an important tool for investors as Japanese institutions migrate to this as the default index," Imai explains. "It gives them the opportunity to invest in companies with high profitability and return on investment as well as good governance." Nikko Asset Management was one of the first to launch an ETF based on the Nikkei JPX400 in January 2014, now the fund has USD500 million under management2

Real estate investment trusts (REITS) is another area in which the asset manager is seeing growth. The firm has USD800 million under management in Japanese REITS and Imai reports that it is popular with institutions and private investors3. "Real estate in Japan is recovering," he says, "and there is extra momentum from the 2020 Olympics and associated development projects, plus in a low global interest rate environment the current yield is competitive." 

Imai believes that the ETF market is poised to continue to grow rapidly in Japan; at a recent seminar with investors from 12 Japanese banks ETFs dominated the discussion. "Previously, people were not motivated to invest in the Japanese market but now due to Abenomics, ETFs are expected to grow significantly," Imai says. 

Imai adds that the changing needs of investors means the firm is looking beyond traditional ETF strategies. 

1 AuM as of 03/31/2015.
2 AuM as of 06/30/2015.
3 AuM as of 06/30/2015.

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