BOJ Cuts Nikkei 225 Buying Amid Concern It’s Warping Markets

Is BOJ's Targeting of Yield Curve a Sensible Move?
  • Central bank to increase purchases of Topix ETFs instead
  • Topix outperforms Nikkei 225 after Kuroda’s decision

The Bank of Japan will reduce investments in the Nikkei 225 Stock Average and buy more exchange-traded funds tracking the Topix index, following criticism its ETF buying is distorting the stock market.

The central bank said as part of its monetary policy review that it will allocate 2.7 trillion yen a year ($26.4 billion) to Topix ETFs, while the remaining 3 trillion yen will be spread out between the Topix, Nikkei 225 and JPX-Nikkei Index 400. Previously it had allocated the 5.7 trillion yen across all three measures in a way that favored the Nikkei 225. The Topix jumped 2.7 percent Wednesday, while the Nikkei 225 rose 1.9 percent.

“Buying more in the Topix is good news for the market, and should help to stop some of the distortion going on,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. “It should relieve some of the impact they are having on the market.”

The BOJ also kept its 300 billion yen of purchases in companies that boost wages and capital spending unchanged, leaving overall equity buying at 6 trillion yen.

Govenor Haruhiko Kuroda had been facing increasing criticism that the BOJ’s ETF buying program was favoring stocks on the price-weighted Nikkei 225 over the Topix, which ranks members based on their market value. Analysts had also raised concern that if the central bank continued its current pace of purchases across the indexes, it could dominate trading in some shares on the Nikkei 225.

Fast Retailing Co., for example, accounts for about 8 percent of the Nikkei 225, versus just 0.3 percent of the Topix, meaning it benefits disproportionately from the central bank’s Nikkei 225 purchases. The BOJ already owns about half the company’s free float and that could rise to 63 percent by year-end, Nomura Holdings Inc. said in a note at the end of July. Fast Retailing’s shares tumbled as much as 4.6 percent Wednesday before recovering to end the day 1.5 percent higher.

The Nikkei 225 had been outperforming Topix until recently. At one point last month the narrower gauge outperformed the broader measure by the most since 1999. As speculation grew the BOJ may shift its purchases away from the Nikkei 225, the trend has started to reverse. The Topix closed 0.4 percent higher on Tuesday, compared with a 0.2 percent decline on the Nikkei 225.

The change in strategy means the BOJ will now allocate about 25 percent of its annual purchases to Nikkei 225 ETFs, down from 55 percent, estimates Keiichi Ito, chief quantitative analyst at SMBC Nikko Securities Inc. The proportion set for the Topix will jump to 67 percent from 40 percent, while JPX-Nikkei 400 buying will probably climb 3 percentage points to 8 percent, Ito said.

More Balanced

“Instead of an overemphasis on larger shares on the Nikkei 225, the BOJ will be buying ETFs in a more balanced manner that’s in line with market capitalization,” Takuya Takahashi, a Tokyo-based senior strategist at Daiwa Securities Group Inc. “Shares that were overbought so far -- basically Nikkei 225 shares with a high weighting on the index -- will be sold, while those that were overlooked will probably be seeing some buying.”

The heavy presence of the BOJ in the Nikkei 225 has raised concern among some investors. The central bank is on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 Stock Average by the end of 2017, according to estimates compiled by Bloomberg last month. The bank owned about 62 percent of Japan’s domestic ETFs at the end of July, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg.

Nicholas Smith of CLSA Ltd. in Tokyo, said last week he was “absolutely certain” the BOJ would stop buying exchange-traded funds tracking the Nikkei 225. The strategist said he had been talking to BOJ officials about why the BOJ should stop purchases of a measure he calls “a Flintstones index from the abacus era,” and said they were “more than aware of the feelings on the subject.”

The Nikkei 225 has “been a laughing stock for a long time,” Smith said on Sept. 16 on the phone. “They will buy the Topix, which is the neutral, fair, equitable choice.”

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