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BOJ rate cut no solace for top Japan fund that's staying in cash

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[TOKYO] J Flag Investment Co, an investment advisory firm which helps run among the top five funds in Japan, says the Bank of Japan's move to negative interest rates won't assuage investor anxiety or damp volatility in the nation's stocks.

[TOKYO] J Flag Investment Co, an investment advisory firm which helps run among the top five funds in Japan, says the Bank of Japan's move to negative interest rates won't assuage investor anxiety or damp volatility in the nation's stocks.

The firm, which advises on 25 billion yen (S$300.6 million) in assets, boosted cash last year and has no plans to get back in the market because it expects stocks to remain volatile over the next three to six months even after the central bank lowered its interest rates to minus 0.1 per cent on certain holdings. J Flag's long-only fund rose 24 per cent in 2015, the fourth best- performing fund among 26 Japan-focused peers tracked by Eurekahedge Pte.

Concerns about a global recession because of China's economic slowdown have sent major Japanese indexes plunging by more than 10 per cent this year, before the Bank of Japan's surprise move on Friday pushed the Topix Index to the highest level in more than two weeks. Hisashi Osezawa, chief executive officer of J Flag, said gains may not be sustainable as the outlook remains unclear.

"Even though the stocks were up, it is hard to tell whether this will continue," Mr Osezawa said in a telephone interview. "It remains a concern that global economy may be heading toward deflation." Japanese stocks rose for a second day after the Bank of Japan's decision on Friday. The Topix index added 1.4 per cent as of 10:40 am in Tokyo, paring the index's worst start to a year since 2009.

The hedge fund advisory firm runs the Simplex J Flag Fund, a 1.5 billion yen long-short fund, which has about half of its assets in cash, and the Simplex J Flag Japan Equity Fund, a 1 billion yen long-only fund, which holds 10 per cent in cash, Osezawa said. The long-only fund's declines in 2016 have been in line with the Topix Index, he said, which fell about 7.5 per cent this year through Friday.

Two stocks the fund owns more than doubled last year, helped by inbound tourism and demand for Japanese goods. Shares of Istyle Inc, an online cosmetic retailer that also owns shops, surged by more than 8 times, while Ariake Japan Co, a maker of natural seasonings, rose 128 per cent.

Mr Osezawa said he is shorting Pachinko-related companies because players of the recreational machine game tend to be people in their 60s and older, which means demand will decline going forward. He wouldn't identify companies his funds are shorting.

By a 5-4 vote, the Bank of Japan Governor Haruhiko Kuroda led his colleagues to introduce a rate of minus 0.1 per cent on certain excess cash holdings after he rejected the idea of negative rates just last month. Even after Friday's gain, the Topix has declined 7.5 percent so far this year, while the Nikkei 225 Stock Average has dropped about 8 per cent.

"There are just too many negative factors in the global market right now. It is not a good time to get into the market." said Mr Osezawa. "We are just in the beginning of this."

BLOOMBERG