Though the outlook for the yen remains as murky as ever ahead of Bank of Japan and U.S. Federal Reserve policy reviews, some fund managers think Japanese stocks are looking attractive again after tumbling 13 percent from January.

Foreign and domestic hedge funds are anxious for payback, after average losses of 4.2 percent in the first seven months of the year, according to data tracker Eurekahedge.

Many had shorted the yen, betting that the Fed would hike interest rates several times this year, boosting the dollar, while the BOJ's negative interest rate was seen keeping a lid on the yen.

Since the yen and Japanese stocks are closely correlated -- stocks generally fall when the yen rises and vice versa --investors who got the yen wrong generally got stocks wrong, too.

They were further wrong-footed by the yen's surge as investors scrambled for safe havens after Britain's surprise vote in June to leave the European Union.

BUYING OPPORTUNITY?

Hedge funds now think the market's repricing has created some opportunities in equities.

"We have been buying a bit more and covering our shorts," said Michael Kretschmer, who runs a $100 million Japan stock-picking hedge fund out from the Netherlands.

"Gradually over the past one-and-a-half weeks we have been picking up a few cyclical stocks with regional exposure to China."

Other funds are looking to the next round of earnings soon from some of Japan's top firms to help them assess valuations after the first-half's firesale.

"The initial reaction when a macro thesis fails is for all equities to get punished," said Edward Rogers, founder of Tokyo-based fund of hedge funds Rogers Investment Advisors.

"Of 20 companies, if 10 have way better numbers, then all of a sudden people go out and buy that stock again, so our managers benefit from holding that stock."

BlackRock's largest mutual fund said last week that Japanese equities were now cheap and that it was increasing its holdings to about 10 percent.

Katsunori Sago, chief investment officer of Japan Post Bank, which plans to start hedge fund investment later this year, says hedge funds with new technologies and strategies may outperform.

"Because there's been a diversion between monetary policy-makers' intentions and market directions, some hedge funds are not able to produce returns as they used to. On the other hand, funds that make full use of latest-generation technologies, such as big data, are doing well."

YEN STILL A BIG QUESTION MARK

The yen has risen from 120.30 against the U.S. dollar at the start of the year to around 100.

"These investors planned to make money on both sides of the trade. However, as the yen grew stronger, that trade didn't work, people had to unwind large short positions," said Frank Packard, president of TAP Japan, an investment advisor.

So-called long-short hedge funds -- which bet on stocks rising and falling -- have lost an average 3.82 percent this year versus gains of 5.72 percent in the same period last year, the Eurekahedge data showed, with some blaming central bank policy for losses.

"The Bank of Japan buying equities is distorting markets and we are losing out from betting against the crowded smart beta phenomenon," said Kretschmer at Dutch-based Pelargos Capital.

Smart beta refers to passive investment strategies that use computer algorithms to trade on market trends with lower fees.

Long-only funds lost an average 7.44 percent, versus a rise of 11.25 percent last year.

Activist hedge funds that buy shares and push for management change have lost 5.7 percent this year, versus gains of 16.7 percent.

Funds that focus on the currency are now watching policy, rather than fundamentals, as the market's main driver.

Japan's economic growth stalled in the second quarter as weak exports and shaky domestic demand prompted companies to cut spending, putting fresh pressure on Prime Minister Shinzo Abe to come up with policies that will produce more sustainable growth.

Many market watchers also expect the BOJ to ease policy further, despite growing fears it is nearly out of options and that any respite for the yen would be short-lived.

(Reporting by Maiya Keidan and Tomo Uetake; Editing by Kim Coghill/Keith Weir)

By Maiya Keidan and Tomo Uetake