The Bank of Japan's Unstoppable Rise to Shareholder No. 1

Inside the Tokyo Whale's Unstoppable Rise
  • BOJ set to become top owner of 55 firms in the Nikkei 225
  • Japan’s central bank boosted its ETF buying program last month

The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.

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. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

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.”

While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer 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.

For a QuickTake Q&A on the BOJ’s stimulus, click here.

The central bank’s influence on Japanese stocks already rivals that of the biggest traders, often called “whales” in the industry jargon. 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.

Fanuc views the BOJ in the same way it does any other shareholder, a company spokesperson wrote in an e-mailed response to questions from Bloomberg News. Spokesmen at Fast Retailing and Yamaha declined to comment. Advantest and Olympus couldn’t be reached as their offices were closed for Japan’s Obon holiday.

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.

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. The monetary authority’s estimated 8.9 trillion yen of ETF holdings at the end of June amounted to less than 2 percent of Japan’s total stock-market capitalization.

Unconventional Policy

While the BOJ has pushed unconventional monetary easing further than peers, its market intervention is hardly unique. The Bank of England unveiled a $13 billion plan to purchase corporate debt on Aug. 4, less than two months after the start of a similar program at the European Central Bank. During the Asian financial crisis in 1998, Hong Kong bought local shares to defend its currency peg, helping to fuel a rally that allowed it to dispose of the stake within five years.

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.”

Disappearing Float

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.

The free float at Fast Retailing Co., whose top weighting in the Nikkei 225 makes it a major recipient of BOJ money, is about 25 percent 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.”


Japan’s government bond market offers a guide to the risks of further intervention in stocks, said Akihiro Murakami, the chief quantitative strategist for Japan at Nomura in Tokyo. JGB volatility soared to the highest level since 1999 in April, while trading volume has slumped as the central bank’s holdings swelled to about a third of the market. It’s still buying at an annual rate of 80 trillion yen.

“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.”

The central bank owned about 60 percent of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62 percent in July.

The monetary authority spreads purchases across funds that mimic Japan’s most popular indexes -- the Nikkei 225 and Topix -- along with the JPX-Nikkei Index 400, which is meant to showcase the nation’s shareholder-friendly companies. A smaller slice of its budget goes to ETFs tracking firms that boost wages and capital expenditure.

The Nikkei 225 slid 0.3 percent on Monday, bringing this year’s drop to 11 percent.

Governance Concerns

While there’s no sign that the central bank will use its 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.

“The BOJ being a stable shareholder of such a large ratio of stocks is going to make investors question if governance is being held to account, and the debate around this is going to get more aggressive as they increase holdings,” Sumitomo Mitsui’s Ichikawa said. “People are going to question how long the BOJ should keep this policy going.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE