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Recent Developments in Leveraged Investment Funds

May 27, 2016
Kota Okabe, Fuminori Niwa, Takao Sasaki,Teppei Nagano
Financial Markets Department

In Japan, households have been rapidly increasing their stock investments using leveraged investment funds (leveraged exchanged traded funds [ETFs] and mutual funds). Some market participants are concerned that (1) the associated rebalancing demand may amplify the volatility in stock markets and that (2) the liquidity in the leveraged investment funds market may decline as capital flows regarding the process for creating and redeeming ETF shares become large, which creates stress on the entire stock market. Up until now, empirical evidence suggests otherwise, as the impact of rebalancing demand is curbed by capital flows on contrarian investors' fund demand, and market liquidity is maintained at a sufficiently high level. Yet, it is necessary to pay close attention to developments in leveraged investment funds, particularly their impact on financial markets during times of stress. In addition, paying such close attention would be beneficial for grasping households' risk-taking stance.


Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2016-J-1, is a translation of the original Japanese version, 2016-J-1, published in January 2016. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments or questions, please contact Financial Markets Analysis Group, Coordination and Market Analysis Division, Financial Markets Department (Tel:+81-3-3279-1111).