[AP]
[AP]

Japan's Financial Services Agency has moved to block the domestic sale of leveraged ETFs tracking individual Japanese stocks that were established overseas, citing concerns that such high-risk products — not permitted under Japanese rules — could amplify share price volatility and distort market pricing if sold to Japanese investors through foreign markets.

The FSA revised its financial instruments business Q&A on Thursday, stating that selling in Japan leveraged ETFs established abroad and tied to individual Japanese stocks is "not appropriate in the public interest," the Nikkei reported Friday.

The revision is widely interpreted as a message to securities firms and other financial product distributors to refrain from handling such products domestically. The FSA said leveraged ETFs based on Japanese equities could amplify share price swings at listed companies and have a significant impact on market price formation.

Leveraged ETFs are designed to deliver two or three times the daily return of a specific index or stock. When the underlying asset rises, gains are multiplied — but so are losses when it falls. Products tied to individual stocks are of particular concern because they can concentrate buying and selling pressure on a single company's shares, heightening volatility.

Japan permits leveraged ETFs that track broad stock indexes but does not allow the domestic listing of leveraged ETFs linked to individual company shares. The problem was that ETFs approved overseas could be sold to Japanese investors in the form of "foreign investment trusts" if the fund manager filed a notification with Japanese financial authorities and completed disclosure procedures.

In effect, a backdoor existed: asset managers could list individual-stock leveraged ETFs in the United States or other markets and then sell them back to Japanese investors. The FSA's Q&A revision was a preemptive move to close off that "reverse landing" route before it could be exploited.

The action comes as US asset managers have been pursuing a string of leveraged ETF launches tied to major Japanese companies. Five US firms — including Tuttle Capital Management, ProShares and Tidal Financial Group — recently filed with the SEC for approval to list leveraged ETFs tracking Kioxia's share price.

Products linked to the shares of Toyota, Sony Group and SoftBank Group are also reportedly awaiting approval. Matthew Tuttle, CEO of Tuttle Capital Management, which is pursuing the Kioxia leveraged ETF, had previously indicated he would notify Japanese authorities of plans to sell the product there once SEC approval was secured.

South Korea's market experience appears to have influenced the FSA's decision to raise its guard. In May, leveraged ETFs tied to individual stocks — specifically Samsung Electronics and SK hynix — were listed in South Korea. Retail investor money poured in, sending the underlying shares into sharp swings and stoking broader market concern.

South Korean financial authorities responded by raising deposit requirements for trading and temporarily suspending new listings of such products. The FSA is seen as having drawn on that experience to focus on market stability before individual-stock leveraged ETFs could take hold more widely.

While individual-stock leveraged ETFs can serve as short-term trading instruments, returns over longer holding periods may not simply accumulate at the stated multiple. That is because fund managers must repeatedly rebalance the underlying assets or derivatives to hit the daily return target. In volatile markets, losses can mount quickly, and the constant rebalancing can create additional trading pressure across the broader market.

The FSA's move is understood as an effort to head off the domestic influx of high-risk financial products and prevent excessive swings in individual stock prices. As individual-stock leveraged ETFs proliferate rapidly — led by the US market — regulators around the world are expected to tighten their oversight in response.


rainbow@heraldcorp.com