In the aftermath of the BOJ’s announcement that it would almost double its ETF purchases to ¥6 trillion, or $58 billion, up from the current ¥3.3 trillion, we put this number in context. Over the next year, BoJ is scheduled to purchase ¥6t ($58b) in ETFs, and $116b over the next two years. By June of 2018, BoJ is likely to hold ¥20.5t ($200b) in ETFs.
Three ways to put BoJ’s purchases in perspective:
- The US market cap is 5x Japan’s, so this new stimulus can be viewed as equivalent of the Fed purchasing $580b in ETFs over the next two years, and the Fed holding $1t in ETFs. Of course, this is just a hypothetical exercise as the Fed is prohibited from purchasing equities. But the new stimulus illustrates that BoJ is concerned with the severity of bearishness in Japan’s equity market, and that such drastic purchases are necessary to reverse the bearishness.
- In Oct 2014, Government Pension Investment Fund announced a new asset allocation of its ¥127t assets. Among other changes, its domestic equity allocation increased from 17% to 25%, or an increase of +¥10t. So BoJ’s ETF purchases over the next two years and GPIF’s equity purchases may be in the same ballpark.
- So far this year, foreign investors have sold almost ¥5t in net of Japanese equities. That’s smaller than BoJ’s annual purchase rate of ¥6t.
While dramatic, some additional facts courtesy of Bloomberg should convey just how truly unprecedented the move truly is: with the BOJ already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings.
Just as insane, the central bank owned about 60% of Japan’s domestic ETFs at the end of June. This is up from just over half as of a few months ago suggesting that the BOJ is gobbling up equities at an unprecedented pace.
At this point the usual debate begins: is central bank intervention good (of course, the bulls say) or bad (everyone else grudgingly admits). While bulls have cheered the tailwind from BOJ purchases, opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient. Traders worry that the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year.
“Only in Japan does the central bank show its face in the stock market this much,” said Masahiro Ichikawa, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co., which oversees about 12 trillion yen ($118 billion). “Investors are asking whether this is really right.”
Investors may ask, but the BOJ doesn’t care, as it has now become the single, most dominant force in the equity market, and would rather traders thanked it, and be on their way, than worry about the “long-term.” As for the BOJ “showing its face in the stock market this much”, both the SNB and the ECB are now just as actively involved in the equity market, as reported previously.
As Bloomberg adds, while the BOJ doesn’t buy individual shares directly, it’s the ultimate owner of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.
Meanwhile, Kuroda’s insane buying spree means that the central bank’s influence on Japanese stocks already rivals that of the biggest traders, locally called “whales”. It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent.
The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members, including Olympus Corp., the world’s biggest maker of endoscopes; Fanuc Corp., the largest producer of industrial robots; and Advantest Corp., one of the top manufacturers of semiconductor-testing devices.
The list below shows the top BOJ holdings as of this moment.
The Japanese central bank finds nothing out of the ordinary with becoming the top holder of dozens of stocks, and instead falls back to its cliche of an explanation:
A central bank spokesman, who asked not to be named citing BOJ policy, said the ETF purchases will help officials reach their 2 percent inflation target as soon as possible. Consumer prices fell 0.4 percent in June from a year earlier, the fourth straight month of declines.
It may get even more insane: Kuroda has argued that ETF purchases will help spur economic activity and inflation by boosting risk appetite in Japan. After the BOJ’s last meeting on July 29, he said the central bank has room to increase buying if needed.
As noted above, the bulls love it. For Takashi Aoki, a fund manager at Mizuho Asset Management, the ETF program’s downsides aren’t substantial enough to justify removing it from the BOJ’s toolkit. “The goal is to get Japanese companies making money again, and to reach 2 percent inflation,” said Aoki, whose firm oversees about $50 billion. “The scope of the BOJ’s buying is what’s needed to reach that target. It’s effective.”
Actually, if Takashi has seen a chart of Japan’s core CPI, he will note that monetizing stocks has been anything but effective, but who actually bothers with facts these days.
The good news is that, at least for now, the liquidity of the stock market has not collapsed (unlike what has happened in the JGB market where the BOJ is virtually running out of willing sellers). So far, there’s little evidence that the BOJ’s purchases are disrupting the smooth functioning of Japan’s stock market, according to Keiichi Ito, the chief quantitative analyst at SMBC Nikko Securities Inc. But that could change as the buying increases, Ito said, particularly for stocks with low free float, or shares available for trading.
Take the example of Fast Retailing, whose free float is about 25% of shares outstanding. The BOJ owns about half the company’s free float now, a proportion that will rise to 63 percent by year-end, according to Nomura Holdings Inc., Japan’s biggest brokerage. BOJ purchases could soak up the remaining free float at companies including Comsys Holdings Corp. and Tokyo Electron Ltd. over the next year, according to analysts at Goldman Sachs Group Inc. “It’s going to become hard to trade,” Ito said. “Stocks that have a low free-float ratio will become very volatile.”
However, just because liquidity is here today, does not mean it will be there tomorrow. “If the BOJ does not sell stocks, then liquidity will disappear,” Murakami said. “As liquidity falls, the number of shares you can buy starts to decline — the same thing that’s happening in the JGB market.”
While some raise the question of governance, or just how will the BOJ intervene as a top shareholder in determining the future of so many public companies…
While there’s no sign that the central bank will use its stock holdings to influence how Japan’s public companies are managed, some investors worry that BOJ purchases could give a free ride to poorly-run firms and crowd out shareholders who would otherwise push for better corporate governance. The BOJ isn’t explicitly subject to Japan’s stewardship code for institutional investors, designed to encourage stockholders to push companies for better performance.
… a far more obvious question is ignored: just how will the BOJ ever unwind its unprecedented holdings of not only bonds, which are now roughly 100% of Japan’s GDP, but also of stocks, without crashing both the bond and the stock market. And then we remember, that the BOJ will simply never unwind any of its “emergency” opertions just because nobody actually thought that far, plus the whole point of the exercise is hyperinflation or bust, as the sheer lunacy of Japan’s authorities is exposed for the entire world to see, leading to the terminal collapse of faith in the local currency. With every passing day, we get that much closer to said terminal moment.
