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* Foreigners sell 3 trln yen Japanese shares, futures so far
* Impatience mounts over stalled structural reform
* Trade volume falling, investors shift to defensive stocks
* Some worry Abe nationalism is distracting from economy
By Tomo Uetake
TOKYO, March 20 A torrent of foreign capital
into Japanese shares, the driving force behind last year's
surge, has reversed, as impatience with "Abenomics" made Tokyo
one of the worst-performing markets since the start of 2014.
The first two arrows in Prime Minister Shinzo Abe's policy
quiver - huge government spending and unprecedented monetary
easing - drove the Tokyo market up 57 percent in 2013.
But foreign investors are growing tired of waiting for the
third arrow, structural reform for long-term growth.
Some also fear he has become preoccupied with a nationalist
agenda that risks upsetting major trading partners, China and
"If Prime Minister Abe doesn't act quickly, he is going to
waste what has been an exceptional opportunity to make a
significant change," said Robert Taylor, partner and portfolio
manager at Harris Associates in Chicago. "I feel like every day
that goes by, the window is closing for him to move towards
Foreign investors have sold a net 1.84 trillion yen ($18.1
billion) of Japanese stocks so far this year, reversing from
2013 when they bought a record 15.1 trillion yen, data from the
Japanese stock exchanges showed on Thursday. Last week's selling
was the most in almost 27 years and the second-highest on
With overseas investors controlling about 70 percent of
market volume, according to the Tokyo Stock Exchange, the
benchmark Nikkei average has fallen 13 percent this
year, outpacing a 4 percent decline in ex-Japan Asian shares
and compared with a 1 percent gain in the S&P
Longer-term, "real money" foreign investors still have big
investments in Japanese stocks, but some hedge funds and other
agile players may have pulled out, at least for now.
On top of selling in the cash market, foreign investors have
sold a net 1 trillion yen of futures contracts on the Nikkei and
other indexes so far this year, just erasing last year's net
purchases. Speculators such as global macro funds aggressively
use the futures markets, traders say.
MONEY OFF THE TABLE
In another sign of falling interest, trade volume in Topix,
based on a 20-day rolling average, has fallen near levels seen
before Abe took office, and less than half the May-June peak.
The cold shoulder from overseas forced Japan Display Inc to
cut the portion of Wednesday's initial public offering reserved
for foreigners to 37.5 percent from 45 percent in the year's
biggest Japanese listing. The stock plunged 15
percent in its first day of trading.
It is too early to call the end of investors' Abenomics
fever. Profit-taking is normal after a big run-up, especially
with global worries like the U.S. Federal Reserve curtailing its
stimulus, China's slowdown and Russia's seizure of Crimea.
But there is a sense that the easy gains in Japan have
already been made, and investors see pitfalls ahead, such as
worries of a slowdown for the world's third-biggest economy as
exports sputter despite a weak yen and Abe prepares to raise the
national sales tax on April 1.
Just when Japan needs strong exports to offset the expected
drag on consumption from the tax hike, shipments abroad are
losing momentum. Exports fell 0.2 percent by volume last year,
getting little help from an 18 percent drop by the yen against
the dollar - one of the more tangible effects of Abenomics. This
month, the Bank of Japan downgraded its assessment on exports.
Foreign investors "took some money off the table. They have
so much profits to take - better safe than sorry," said Olivier
d'Assier, managing director of Axioma, U.S.-based financial risk
management consultancy firm, whose clients include major pension
funds, hedge funds and brokers around the world.
While many foreign investors are staying in the market,
their strategy is subtly shifting, as they rotate out of last
year's winners, such as consumer discretionary stocks and
industrials, to defensive stocks, d'Assier said.
"Investors are pulling back bets on economic growth," he
added. "For me, that is a warning flag. They are hoping for the
best while preparing for the worst."
Foreign investors' buying is needed if Japanese shares are
to recoup their 13 percent fall from the end-December six-year
high, much less make further gains.
Japanese investors remain cautious after more than a decade
of poor performance and deflation. Domestic institutional
investors are also shunning risk because of regulatory reasons
such as Basel III for banks and solvency ratio for insurers.
Bank of Japan board member Takehiro Sato said last month
that foreign investors appear disappointed by Abe's lack of
reforms. A big risk for the market is that Abe, who has unveiled
two versions of his "growth strategy," will similarly fail to
wow investors with the next instalment, promised for June.
Investors want to see structural reforms ranging from
deregulating a rigid labour market, to corporate tax cuts, and
participation in the Trans-Pacific Partnership, a Pacific-wide
trade deal of 12 countries, which could force Japan to drop some
barriers to in place to protect farmers.
Abe's popularity gives him political capital needed to push
through politically difficult decisions, investors say, but many
fear he may be squandering his opportunity, especially with his
increasing focus on military and nationalist issues.
Abe visited a shrine to Japan's war dead in December,
sparking anger from China and South Korea, who saw it as a
glorification of Japan's wartime and colonial past.
"Most investors are concerned about Abe's nationalist agenda
and, for that matter, the potential conflict with its neighbour
and most important trade partner, China," said Michael
Kretschmer, senior portfolio manager at Pelargos Capital in the
Hague in the Netherlands.
"The economic impact of the increased tensions is for real,
and investors will and should apply a discount to stocks that
are heavily exposed to China, not only from the demand side but
also production side."
Even Japanese companies are on edge. One-fourth of
executives in a Reuters survey said they are concerned about
Abe's diplomacy with China and other neighbours. Many of those
who said there has been no effect on their business urged the
premier not to rile other countries.
China is Japan's largest trade partner. Over 22,000 Japanese
companies are in China, from Toyota Motor Corp to small
software developers, many using China as a production base.
Japan's exports fell in 2012, when a territorial dispute
between the two countries led to anti-Japan protests in China
and China-bound exports dropped more than 10 percent.
Abe's focus on conservative issues dear to his political
base does not necessarily mean he will neglect the economy.
"If you have a revision of the self-defence guidelines, does
that mean that you cannot have a corporate tax cut? It makes no
sense," said Jesper Koll, head of Japanese equity research at
($1 = 101.5500 Japanese Yen)
(Writing by by Hideyuki Sano; Editing by William Mallard and