BOJ Becomes ETF Managers’ Best Friend With Half the MarketYuji Nakamura and Yuko Takeo
At a conference last month in Tokyo celebrating Japan’s exchange-traded funds, the biggest buyer was nowhere to be seen.
“I think they registered, but I’m not sure if they’re attending,” Kana Kawasaki, who works for the event organizer S&P Dow Jones Indices, said from the floor of the Imperial Hotel in the center of the city.
She was referring to officials from the Bank of Japan, whose low profile belies its influence in a market where it owned 6 trillion yen ($49.9 billion) of ETFs, about half of those trading in the country as of the most recent bourse data. Passive investments are the vehicle of choice for the central bank as it tries to stimulate the economy without favoring specific companies.
The foray into the stock market is sparking a boom that, helped by a near doubling of stock prices, has swelled ETF assets by 159 percent over two years and jacked up profits at managers running the funds.
Now, with inflation continuing to fall short of the BOJ’s target, analysts are expecting Governor Haruhiko Kuroda to expand easing and pump even more cash into equities.
“When you ask who we should thank for this, in Japan it’s Prime Minister Abe and Governor Kuroda,” Hibiki Muneta, director of investment at Simplex Asset Management Co., which oversees about $2 billion of ETFs, said to the crowd at the conference on April 2. “If it wasn’t for them, our assets wouldn’t be at this level.”
Central banks venturing into markets to buy securities like bonds isn’t unusual -- the Federal Reserve and Bank of England have both done so. Buying stocks via ETFs, however, is unique. The BOJ started doing it in 2010 as a catalyst to spur more trading and promote “more risk-taking activity in the overall economy,” the bank said.
Not everyone sees how ETF buying will spur inflation, the broad objective of Kuroda’s stimulus measures. Maiko Noguchi, an economist at Daiwa Securities Group Inc. and a former official at the central bank, said it’s fine for bolstering investors’ sentiment and even pushing up share prices.
“But that’s not their end goal,” Noguchi said. “They’re ultimately pursuing inflation. So the question is, how do the two connect? And it’s a little hard to find a straightforward answer to that.”
With inflation barely eking out a gain in March, 23 of 34 economists surveyed by Bloomberg expect the central bank to ease more by the end of October. Having stretched the stimulus program so far that the BOJ can already buy every new bond issued by the government each month, further expansion means the central bank may have to focus on other securities.
The BOJ didn’t respond to e-mailed questions about the program’s goals. In March, Kuroda said the amount of ETFs that the central bank buys is extremely small. While its holdings account for about half the ETF market, they’re still a fraction of the Tokyo bourse’s main board, which is valued at about 580 trillion yen according to data compiled by Bloomberg.
For ETF managers, Kuroda has been a godsend. Originally limited to about 450 billion yen when started in October 2010, the BOJ’s program was set to expire by around the end of 2011. After several extensions, buying began to swell under Kuroda, who expanded purchases to 1 trillion yen a year in April 2013 before tripling them in October.
Assets in the 17 funds the central bank is permitted to buy have more than doubled since Kuroda’s first round of easing. Growth has been concentrated in those funds, which accounted for about 85 percent of the industry’s $101 billion of assets in Japan as of Feb. 10, Bloomberg and exchange data show.
“After the BOJ started buying, newspapers began writing about it and suddenly people became aware of ETFs,” said Junichi Honda, head of the ETF department at UBS Global Asset Management Co. in Tokyo. “For those of us working in the industry, it was a real life-saver.”
The biggest beneficiary has been the money-management arm of Nomura Holdings Inc. Assets in three funds that the BOJ is eligible to buy jumped to 5.4 trillion yen at the end of March, up 123 percent from two years earlier, data compiled by Bloomberg show. The unit of Japan’s biggest brokerage was the world’s seventh-largest ETF provider as of February, up from a ranking of ninth in 2013, according to BlackRock Inc.
Like other fund managers, Nomura charges investors a management fee on its ETFs that amounts to about 0.2 percent of assets. Based on that math, revenue from such fees probably climbed to a record 9.1 billion yen in the year ended March, data compiled by Bloomberg show. Nomura’s overall revenue in the fiscal year ended March shrank by 12 percent from two years ago, while its asset-management unit recorded a gain of 34 percent.
Not all the industry’s growth is attributable to the BOJ. ETFs on the central bank’s balance sheet expanded by 4.1 trillion yen in the two years through February, accounting for 69 percent of inflows to the funds it can buy, according to calculations by Bloomberg based on TSE data. The rest can probably be attributed to institutional investors, said Jason Miller, head of BlackRock’s ETF unit in Japan.
“Clearly, they’re having a significant impact,” said Miller of the central bank. “But there’s still considerable growth underneath the BOJ buying program.”
Large lenders, insurers and regional banks have been purchasing his Nikkei 225 Stock Average fund, he said. BlackRock started an ETF linked to the JPX-Nikkei Index 400 in December, two months after the central bank said it would buy funds tracking the measure.
Other asset managers are expanding. Sumitomo Mitsui Asset Management Co. started its own Nikkei 225 ETF in March, while Diam Co. did the same in January.
Analysts at Nomura predicted in March that the BOJ will double ETF purchases to 6 trillion yen a year in October.
The boost could be short-lived. In the same report, Nomura said it expects the BOJ to begin reducing the scale of buying sometime after October 2016. For Koei Imai, who oversees $23 billion of ETFs at Nikko Asset Management Co., this is no reason for concern.
“In such a scenario, the Japanese economy should actually be doing well and capital markets should be robust,” said Imai. “Yes, there may be impact on supply and demand, but by the time they’re seriously considering this, I’d think the market will be doing exceptionally well.”
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