Bank of Japan to re-weight ETF buying

Jul 31st, 2018 | By | Category: Equities

The Bank of Japan has announced changes to its ETF buying programme following concerns that the purchases were having an outsized effect on some stock prices.

Bank of Japan to re-weight ETF buying

Following a meeting of its monetary Policy Board, the Bank of Japan has announced plans to re-weight the allocations its ETF purchases.

Whilst the central bank remains committed to buying 5.7 trillion yen (¥)($51 billion) worth of domestically listed Japanese equity ETFs annually, as part of its efforts to stimulate economic growth and inflation, it has re-weighted the allocations to each tranche of ETF purchases.

The programme, which started in early 2013, has resulted in the BOJ now owning about 4% of the Toyko Stock Exchange’s First Section by value and becoming a top ten shareholder in almost 40% of listed companies, according to data from Nikkei.

It has also resulted in the free float proportion of shares available in the market to decline.

The bank will still allocate funds in two tranches and use the same ETFs. But the allocations to each tranche are to change.

The first tranche is dedicated to ETFs linked to the Nikkei 225 Stock Average, the JPX-Nikkei 400, and the Topix Index, while the second tranche is allocated exclusively to ETFs that track the Topix. In both tranches the amount of each ETF purchased is proportionate to the total market value of that ETF issued.

Previously, the first tranche, which has a large-cap leaning, received ¥3 trillion and the second tranche, more broad-market in nature, received ¥2.7 trillion. From 6 August, the bank will allocate ¥1.5 trillion to the first tranche and ¥4.2 trillion to the second tranche.

Critics had argued that the weights, or ratio, of ETF buying was too heavily tilted towards ETFs tracking large-caps stocks, resulting in the distorted shareholder register. It is anticipated that the revised buying ratio will redress this imbalance.

Flexibility

The BOJ has also signalled that its ETF purchases going forward will be more flexible. Whilst the bank did not explicitly say what this means, analysts are surmising that it will trim its purchases whilst the stock market holds steady.

John Vail, Chief Global Strategist at Nikko Asset Management, said, “More flexibility is a good thing for markets, and it was extended to ETFs too. We interpret the vague language on this to mean ETF purchases will likely decelerate if the market remains on an upward path, but ETF purchases would remain at the current rate if equities decline.”

Annual BOJ purchases of ETFs after the change

Annual BOJ purchases of ETFs after the change

The indices

The Nikkei 225 is a price-weighted equity index consisting of 225 highly liquid large-cap stocks on the First Section of the TSE.

The JPX-Nikkei 400 Index is composed of large- and mid-sized Japanese stocks selected based on fundamental quality and corporate governance.

The Topix – or Tokyo Stock Price Index – is based on all the domestic common stocks listed on the TSE First Section. It is a broad-market index, currently with 2083 constituents.

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