Quantitative Easing

Bank of Japan ETF ownership rises to 63%

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More than a decade after the Bank of Japan decided to buy back exchange-traded funds under an ambitious quantitative easing program, it owns 63% of all locally listed ETF assets, according to data for the year until July.

Although the proportion is higher than the 58% ownership recorded last year by ETFGI, a data provider, it is a reduction from the peak of almost 77% reached in 2017.

Despite some fluctuations, however, one of the anomalies of the Japanese ETF market is that the central bank has held well over 50% of all Japanese ETF assets since 2016 – a fact that has garnered a lot of attention.

One academic study, for example, found that the afternoon returns of stocks comprising the blue-chip Nikkei 225 index were significantly higher than those of non-Nikkei 225 stocks when the BoJ bought ETFs.

However, another study suggested that the BoJ, as a major buy-and-hold equity ETF investor that participates in securities lending, served to stabilize the stock market without causing severe distortions, despite the fact that the purchases made it a major owner of Japan’s largest listed companies.

“The BoJ holding ETFs has brought additional credibility to ETFs in Japan and around the world,” said Deborah Fuhr, Founder of ETFGI. “With larger assets, annual fees on ETFs can be lower,” she added.

Whether the central bank’s huge presence is seen as a positive or negative factor, the biggest question it poses to the market is the possibility that it will ever seek to unwind its positions.

Nomura Asset Management declined to say whether it expected the BoJ to start selling, but pointed out that its buying limit for ETFs had gradually increased by 1 billion yen ($7.44 billion). ) per year when the program was launched at 12 billion yen per year by 2020 when the limit was last set.

John Vail, chief global strategist at Nikko Asset Management, said there was no fear the central bank might pull out of the ETF market.

“I haven’t heard that fear expressed recently, probably due to the realization that it probably won’t happen,” Vail said. “There are certainly no signs that this will happen. The program has existed under many BoJ governors of different stripes, so it will likely continue under any new governor,” he said. added.

Vail pointed out that the ETF program has proven extremely profitable for the BoJ, both in terms of dividend yield and long-term capital gains, and that the program has not drawn any criticism from global central banks. .

“The ETF program is probably far from the first aspect of a possible monetary tightening, which we do not foresee for this year or perhaps for an extended period anyway,” Vail said.

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