Foreign funds and Japanese day-traders have been forced to sell positions on companies listed on the Tokyo Stock Exchange in order to cover non-yen exposures that once delivered high returns. As investors rush to unwind yen carry trades, the currency has appreciated to highs not seen since the early 1990s. But despite the costly yen and weakening stock indices, some fund managers argue Japanese equities look attractive.

Lyxor Asset Management, the alternative investment unit of Societe Generale, is now playing up the Japan story as it launches its seventh exchange-traded fund in Singapore û one that invests in Japan.

The Japan ETF fund, which tracks the Topix, will list on the Singapore bourse on August 30, 2007, following earlier listings in Europe. It expands the current shelf of Japanese products available on the SGX, on top of futures, options and structured warrants.

Topix, the index of choice for Japanese institutional investors, has 1,728 constituent stocks and a market capitalisation of $2,967 billion. The Lyxor ETF, which is denominated in US dollars, tracks it faithfully, says Sandra Lee, managing director and head of retail structured products at Societe General Corporate & Investment Banking who heads Lyxor's ETF business in Asia.

Its top-10 holdings, accounting for 21% of the $22 million ETF portfolio, include Toyota Motor, Mitsubishi Ufj Financial, Mizuho Financial, Sumitomo Mitsui Financial, Canon, Sony, Honda Motor, Takeda Pharmaceutical, Nintendo and Nippon Steel.

Topix hit an all-time low of 770 in March 2003, only to peak at 1,817 on 26 February 2007. Today it has receded to 1,585. It is dominated by exporters, which have carried Japanese equities in lieu of a strong domestic demand story. Japan has now enjoyed 10 straight quarters of positive economic growth, although exporters are the most vulnerable to any reversal in American consumption habits.

Nonetheless, Lee argues that China and Korea have become JapanÆs most important trade partners. This yearÆs first quarter saw Japanese exports rise 10.2% year-on-year, and its trade surplus increased by 74%, even accounting for the stronger currency.

Lyxor has advised the Tokyo Stock Exchange, where it has other ETFs listed, on how to improve its infrastructure in order to attract more such products. The TSE acquired a 5% stake in the Singapore Stock Exchange in June, which is meant to help the two pool resources and develop products together. This ETF appears to be partly a result of that collaboration.