At long last, Japan has finally given the official go-ahead on exchange-traded funds (ETFs ). Japan’s Financial Services Agency (FSA) approved the introduction of the financial products that have experienced explosive growth in the U.S.

This is an historic and long-awaited moment, said Paul Aaronson,

managing director of Standard & Poor’s (S&P). Regulatory approval, a process which dragged along for years, was granted in hopes of stimulating retail investment in the faltering Japanese stock market.

The FSA, Japan’s securities regulator, amended rules to now permit in-kind exchange of stocks in the fund creation and redemption process. In-kind transactions are what give ETFs their tax efficiency, since the fund transfers baskets of stocks and does not sell individual securities, thereby avoiding taxable events for the fund. The FSA indicated that ETFs could be listed on the Tokyo Stock Exchange (TSE) as early as July.

The FSA selected four indexes that will be eligible as the basis for ETFs:

• Tokyo Stock Price Index (TOPIX)
• S&P TOPIX 150
• Nikkei 225
• Nikkei 300

All of the indexes listed above are broad market indexes for Japan. The TSE categorizes all stocks into two sections: First Section and Second Section. The roughly 1,500 stocks in the First Section are generally large-caps, while the approximately 500 securities in the Second Section are newer small-cap companies.

The TOPIX includes all companies in the First Section. The S&P/TOPIX 150 contains highly liquid companies from various market sectors, and represents about 70% of of the market value of Japan’s equity market.

The Nikkei 225 and 300 are broad market indexes created and maintained by the Japanese business media company. The performance of the Nikkei 225, which is Japan’s most closely watched index, is charted below since 1984.

Source. Reuters

Here’s the performance of the S&P 500 index over the same period:

Source. Reuters

According to a statement released by S&P, Barclays Global Investors (BGI) will manage the S&P/TOPIX 150 ETF. Japan is recognizing the importance of ETFs, but we’re waiting for the regulatory environment to catch up, said BGI spokesman Tom Taggart.

In addition, the FSA has approved the listing of S&P/TOPIX 150 futures and options to be launched July 11, according to the Tokyo exchange.