Japan's Topix Outshines Nikkei 225 Thanks to BOJ's ETF Buying

Updated on
  • No enthusiastic Japan stocks buyers beyond BOJ: Mizuho’s Miura
  • Smaller gauge lags behind Topix by most since October 2015

The Bank of Japan’s reduction of the amount it invests in the Nikkei 225 Stock Average is leaving the blue-chip gauge lagging behind the broader Topix index by the most in nearly two years.

Following criticism that its exchange-traded funds purchases are distorting the stock market, the central bank said in September it would reduce its Nikkei 225 buying in favor of the Topix. While a 26 percent slide this year by Uniqlo clothing stores operator Fast Retailing Co. -- which has the heaviest weighting in the price-weighted smaller gauge -- has contributed to its underperformance, falling out of favor with the BOJ is having more of an impact, according to analysts.

“At the moment, there are no enthusiastic buyers of the Japanese stock market beyond the Bank of Japan,” said Yutaka Miura, a senior technical analyst at Mizuho Securities Co. in Tokyo. “In terms of the trading flow, the Topix is getting far more purchases compared to the Nikkei 225.”

The central bank bought a total of 4.1 trillion yen ($37 billion) of ETFs so far this year through Monday. The BOJ’s Topix-linked ETF buying is likely to have reached around 73 percent of its total purchases in July, and is unlikely to have changed much in August, according to Nicholas Smith, a strategist at CLSA Ltd. in Tokyo.  Foreigners sold Japanese shares for three weeks in a row through the week ended Aug. 11.

The NT Ratio, or the Nikkei 225’s closing level divided by that of the Topix, fell to its lowest level since Oct. 22, 2015, on Tuesday. The Nikkei 225 declined 0.1 percent while the Topix rose 0.1 percent on Tuesday.

With Fast Retailing accounting for 6 percent of the Nikkei 225’s weighting, its worst year since 2010 amid a struggle to revive domestic sales and profit growth has helped crimp the Nikkei 225’s 2017 advance to just 1.4 percent versus 5.1 percent for the Topix. The narrower measure also faces criticism for being swung too easily by the movements of a handful of heavyweight stocks including Fast Retailing.

‘Dysfunctional’ Nikkei

The “Nikkei is completely dysfunctional,” and “damages market efficiency,” with its negligible exposure to banks or automakers, the two biggest industries, Smith said. “Really, the Tokyo Stock Exchange ought to phase out Nikkei futures, but they can’t bring themselves to do it.”

The BOJ’s policy tweak, meanwhile, is propping up new winners, according to Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. As foreign investors use Nikkei 225 futures to hedge against their exposure in Japanese stocks, while BOJ’s ETF buying focuses more on Topix-linked, large-cap stocks that are not in the Nikkei 225 but are in the Topix -- namely Keyence Corp., Murata Manufacturing Co. and Nintendo Co. -- are benefiting. Keyence is up 36 percent this year, and was the biggest contributor to the Topix’s gains on Tuesday.

“It was the right thing to do, to shift toward the Topix. But as a result, the NT Ratio will keep on falling gradually,” Fujito said.

Stephen Corry, chief investment strategist for LGT Bank in Hong Kong points out the Nikkei 225’s fortunes are more closely tied to the yen, given the representation of exporter stocks, and that could presage a recovery.

“We forecast weakness in the yen,” because the BOJ is likely to maintain its easy policy while the Federal Reserve begins to tighten, he said. “The Japanese yen has an outsized impact on the Nikkei 225. So when the yen is stronger the Nikkei tends to underperform the Topix and vice-versa.”

— With assistance by Eric Lam

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