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Japan's stock markets are again attracting foreign investors, and there are signs some of them will park their money for a long time rather than a brief stay.
When the Japanese market rallied in early 2013 on excitement about new Prime Minister Shinzo Abe's reflationary thrust, that was driven by speculators such as hedge funds. As Abenomics lost its luster, many foreign investors moved off.
The latest influx involves some money managers with along-term investment time frame. This gives some hope that Japan, whose stock market has been one of the world's choppiest, could see a "serene" rally - steady gains without sharp volatility and abrupt reversals.
While investors are not convinced if Abe's reforms will boost corporate Japan's productivity, they have some reasons to be optimistic, such as possible rises in wages and consumption.
"Today the market reflects higher earnings due to a strong global economy, a weaker yen, the hope of further reform from Abenomics and some evidence of better corporate governance,"said Robert Taylor, partner and portfolio manager at Harris Associates, a Chicago-based mutual fund manager.
During 2014, according to exchange data, foreigners were net sellers of 337 billion yen ($2.79 billion) of futures in the and the Topix. Last month, they were net buyers of 2.386 trillion yen - which Daiwa Securities analyst Shingo Kumazawa says was the largest monthly amount since the brokerage began keeping such records in 1997.
The preferred market
What caught market players' attention was not just the volume of foreign February purchases, but that a large amount of the funds were invested in Topix, rather than Nikkei, futures.
So far this year, the Topix is up 8.8 percent, compared with a 5 percent drop in the same period of 2014.
Many long-term investors prefer the Topix to the Nikkei, as the latter gives disproportionately heavy weighting to a handful of companies whose shares have high prices, such as Fast Retailing.
So when foreigners in February were net buyers of 1.471 trillion yen in Topix futures, smashing November 2014's monthly record of 979 billion yen, that was seen as a signal long-term investors had stepped up their market participation.
Market players said some of the buying in the Topix futures likely came from major "real money" investors, such as sovereign wealth and pension funds.
The options market provides further evidence that the overall Japanese stock market is less driven by speculators than in the past.
Implied volatilities, or the level of choppiness investors expect, have been falling, with the Nikkei volatility index flirting with five-month lows around 19 percent.
"When hedge funds buy, they typically buy call options. So the fact that implied volatilities are not rising shows that the latest rally is driven by long-only investors rather than hedge funds," said Naohide Une, managing director and head of equity derivatives trading at Goldman Sachs.
He also said that the way implied volatilities of all tenors of options are falling "suggests that markets are pricing in a serene rally".
Falling volatility, by itself, could encourage long-term foreign investors to invest in Japanese shares, whose frequent past volatility has cut their attractiveness.
At the same time, the returns in Tokyo for dollar-based investors have been increasing.
Last month, both the Nikkei and the Topix rose above the irrespective 2013 peaks in dollar terms.
So far this year, Topix has gained 7.6 percent in dollar terms, handily beating the 0.6 percent rise for the S&P 500.