Bank of Japan officials see buying exchange-traded funds based on the JPX-Nikkei Index 400 as a future option to boost the impact of unprecedented easing and encourage companies to deploy cash for investment, according to people familiar with the central bank’s discussions.
Including funds that track the index would broaden the range of shares in the BOJ’s ETF purchases, which now target the Nikkei 225 Stock Average and the Topix index, said the people who declined to be named because the talks were private. An increase in funds tracking the JPX-Nikkei 400, higher liquidity and vibrant trading in futures would be required before any decision to add the new benchmark to the bank’s ETF program, the people said.
With capital expenditure at late-1980s levels, the challenge for Governor Haruhiko Kuroda is to get companies to pour record cash into investments that could strengthen a recovery and spur inflation. Buying funds based on the JPX-Nikkei 400, a brainchild of the ruling Liberal Democratic Party that selects members based on profitability and use of cash, would signal that the BOJ is on board with Prime Minister Shinzo Abe’s bid to raise the growth potential of the world’s third-biggest economy.
“Buying the JPX-Nikkei 400 would send a clear message that the BOJ wants to encourage business investment,” said Masaki Kuwahara, an economist at Nomura Securities Co. in Tokyo. “This would also show that the BOJ is hand in hand with the government as Abe is trying hard to push companies to use their cash to strengthen the economy.”
The JPX-Nikkei 400 was down 0.3 percent at 10:06 a.m. in Tokyo, bringing its year-to-date decline to 2.1 percent.
The BOJ targets a 1 trillion yen ($9.8 billion) annual increase in its ETF holdings, as part of monetary easing aimed at generating 2 percent inflation.
The JPX-Nikkei 400, which started in January, picks companies that use cash efficiently and have management that is focused on creating value for investors, Japan Exchange Group Inc. and Nikkei Inc. said in November 2013.
The people said the BOJ must be careful to avoid distorting market prices, and some said it usually takes a year to assess a new market.
Japanese firms boosted their cash stockpile to a record 232 trillion yen at the end of March, according to BOJ data last month, underlining the difficulty Abe faces a year and a half into his drive to reflate the economy.
The BOJ will keep its monetary policy unchanged at its July 14-15 meeting, according to all 34 economists surveyed by Bloomberg News. Thirty-eight percent predict additional easing this year, dropping from 58 percent last month.
Kuroda has said encouraging companies and households to make investments is a key transmission channel for the central bank’s stimulus to achieve a goal of stable 2 percent inflation.
Abe plans to cut the corporate tax rate in stages from the fiscal year starting April, lowering it below 30 percent in a few years, to boost Japan’s competitiveness and attract foreign investment.