The Bank of Japan (BOJ) has been propping up Japanese stocks through its voracious appetite for exchange traded funds (ETFs).
(Bloomberg) — They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank.
While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.
To critics already wary of the central bank’s outsized impact on the Japanese bond market, the BOJ’s growing influence in stocks risks distorting valuations and undermining efforts to improve corporate governance. Proponents, meanwhile, say the purchases provide a much-needed boost to investor confidence. With the Nikkei 225 down 8.4 percent this year and inflation well below official targets, a majority of analysts surveyed by Bloomberg predict the BOJ will boost its ETF buying — a move that could come as soon as Thursday.
“For those who want shares to go up at any cost, it’s absolutely fantastic that the BOJ is buying so much,” said Shingo Ide, chief equity strategist at NLI Research Institute in Tokyo. “But this is clearly distorting the sanity of the stock market.”
Under the BOJ’s current stimulus plan, the central bank buys about 3 trillion yen ($27.2 billion) of ETFs every year. While policy makers don’t disclose how those holdings translate into stakes of individual companies, estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.
The estimates reveal a presence in Japan’s top firms that’s rivaled by few other big investors, often called “whales” in the industry jargon. The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.
If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen — the pace predicted by Goldman Sachs Group Inc. — the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.
“When you see the numbers, you see it’s quite a decent holding,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which oversees about $120 billion. “Central banks are becoming big hedge funds.”
While the BOJ’s ETF buying has come under fire from opposition lawmakers, Governor Haruhiko Kuroda has repeatedly defended the program, saying as recently as last week the purchases aren’t big relative to the size of Japan’s stock market.
At an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund. The central bank’s use of large-cap ETFs means its positions are concentrated, with less impact on the thousands of Japanese companies outside benchmark indexes.
State intervention in stock markets has worked out well for some countries. The U.S. government spent $245 billion to prop up banks during the global financial crisis in 2008, earning a profit of about $30 billion on their investments as the industry recovered. At the height of the Asian Financial Crisis in August 1998, Hong Kong bought HK$118 billion ($15.2 billion) of local shares to defend its currency peg, helping to fuel a rally that allowed it to dispose of the entire stake within five years.
In Japan, there’s little sign that BOJ share purchases have inflated Japanese valuations to dangerous levels. The Nikkei 225 trades at 16 times estimated earnings for the next 12 months, in line with the MSCI World Index. Over the past five years, the Japanese gauge has fetched an average premium of 14 percent.
Still, the longer the BOJ’s buying persists, the bigger the risk that market prices will detach from fundamentals. Assuming Goldman Sachs’s prediction for more stimulus proves correct, the central bank could end up owning a quarter of Mitsumi Electric Co., a supplier to Apple Inc., and 21 percent of Fast Retailing by the end of 2017, estimates compiled by Bloomberg show.
With such large stakes sitting in index-tracking ETFs that lack a mandate to scrutinize company performance, the BOJ’s intervention could also hamper attempts to improve Japan’s corporate governance, according to Nicholas Benes, representative director of the Board Director Training Institute of Japan.
“The reality of index ETFs is that their commissions are very low and they cannot spend much on engagement or analysis for proxy voting,” Benes said.
The central bank said in December that it plans to buy additional ETFs that weigh holdings based on metrics that include research spending and employee wage growth, but it hasn’t started those purchases yet because the funds don’t exist.
While bulls have cheered the BOJ’s efforts to lift share prices, the central bank is bound to reverse its intervention at some point, a potential source of instability that Sumitomo Mitsui Trust Bank Ltd. says is increasingly on the minds of long-term investors.
“Of course, you can argue that we’re in abnormal times so we have abnormal measures,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui. “The biggest question in the future will be: What happens when the BOJ exits?”
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