BOSTON Japan's stock market, usually one of the world's dullest, has turned into a gripping 24-hour roller coaster fueled by fear and punctuated by only short moments of relief.
The action takes place even when Tokyo's own market is shut for the day and is informed by a constant flow of news that often sheds little light on what is happening inside the containment vessels.
Those barriers are not stopping investors from taking positions in a volatile ETF and options instruments that trade in the United States. Some of the activity may simply be aimed at hedging other trades placed before the dull market began its gyrations, though much comes from traders who seek out volatility.
The U.S.-listed iShares MSCI Japan Index exchange-traded fund turned over 400 million shares worth some $4 billion on Tuesday, more than 10 times the fund's average volume over the prior three months. Another 37 million shares traded in the first hour on Wednesday on the New York Stock Exchange.
Why would anyone want to trade amid such uncertainty?
"American investors wanting a short-term play on a Japanese recovery can consider (the fund)," Charles Sizemore, who runs Dallas money manager Sizemore Capital Management, said. While not advocating a long-term bet on Japan, "in the short to medium term, I like Japan as a contrarian value play. Natural disasters tend to have only very short-term effects on the stock market," Sizemore added.
A DROP OF 20 PERCENT IN TWO DAYS
Japan's stock market lost 20 percent in the two days of trading after the devastating earthquake and tsunami hit on March 11. Shares rebounded almost 6 percent in local trading on Wednesday.
The iShares fund provided an outlet for those betting on that rebound after hours on Tuesday. Japanese stocks closed down over 10 percent in local trading. The iShares fund initially traded down sharply as well, hitting a low of $9.24, or an 8 percent loss.
But the fund rallied to finish at $10.03, a loss of just 2 cents from Monday's New York close, presaging the Japanese market's local rally on Wednesday.
In afternoon New York trading on Wednesday, renewed fears of catastrophe at the Fukushima Daiichi nuclear plant 240 km (150 miles) north of Tokyo pushed the ETF's price down almost 3 percent.
Many of the recent moves have tracked changes in the U.S.-listed futures contracts tied to the Nikkei Stock index. The current contract was down almost 4 percent at midday on Wednesday.
The U.S. ETF, managed by BlackRock Inc, is one of the few frequently and easily traded investment vehicles available to most U.S. investors when Japan's market is closed. Investors have added a net $1.9 billion to the fund so far this year, including $651 million on March 14 and 15, BlackRock said.
OTHER TRADES INVESTORS ARE MAKING
In any eventual economic recovery, the biggest gainers might be funds that specialize in smaller Japan companies. These companies populate small-cap stock funds like the SPDR Russell/Nomura Small Cap Japan Fund or the iShares MSCI Japan Small Cap Fund, according to Ron Rowland, chief investment officer at Capital Cities Asset Management in Austin, Texas.
In the past, Rowland has worried about the funds' light trading volume but that has changed since the disaster. "They've been around for four or five years, but now that they've been discovered, perhaps investors will take a continuing interest in them," Rowland said.
Money manager Sizemore agreed that small caps might get a bigger bounce, but warned that Japan has deep, underlying problems that won't go away when the damage is repaired.
"Longer-term, Japan is the short of all shorts," Sizemore said. "The country has debts it can never hope to repay and demographics that are catastrophically bad."
The $5 billion iShares fund owns shares of 323 leading Japanese stocks such as Toyota Motor Corp and Canon Inc in order to track the performance of MSCI's broad Japan equity index.
U.S. options traders also got in on the ETF's action, as volume in puts and calls on the fund was more than 27 times normal on Tuesday. One investor bought 102,500 April calls at an $11 strike price while simultaneously selling the same number of April puts at an $8 strike price.
(With reporting by Doris Frankel in Chicago) (Editing by Richard Satran)