The Bank of Ja­pan goes wild for ETFS

Stim­u­lus ▶ Ja­pan’s cen­tral bank wants to buy an ETF that doesn’t yet ex­ist ▶ “It’s the same as if the BOJ were buy­ing in­di­vid­ual stocks”

Bloomberg Businessweek (North America) - - Conntents - �Yuji Naka­mura and Yuko Takeo

Ex­change-traded funds, the in­dexbased port­fo­lios that can be traded like stocks, grew to al­most $3 tril­lion in global as­sets by the end of 2015. In­di­vid­u­als and big in­sti­tu­tions alike use them to cut in­vest­ment costs and di­ver­sify quickly. In Ja­pan they as­sume an­other role: as a tool for the Bank of Ja­pan to man­age the na­tion’s econ­omy.

The cen­tral bank is al­ready

waist-deep in the mar­ket, and it’s about to wade even deeper. The BOJ holds half the ETF shares in the coun­try. In De­cem­ber it an­nounced it would in­vest $2.6 bil­lion more, tak­ing its an­nual pur­chases to $28 bil­lion. This money would go into ETFS that track Ja­panese com­pa­nies “proac­tively mak­ing in­vest­ment in phys­i­cal and hu­man cap­i­tal,” the bank said.

The hitch is that no such funds yet ex­ist. “I think the mes­sage from the BOJ is for us to go out and make them,” says Koei Imai, who over­sees ETF in­vest­ments at Nikko As­set Man­age­ment in Tokyo. “Us­ing cap­i­tal spend­ing as a fac­tor in de­cid­ing what goes in an ETF is quite un­usual.”

Other cen­tral banks ven­ture into mar­kets to buy bonds—the U.S. Fed­eral Re­serve and the Bank of Eng­land have both done so. Buy­ing stocks via ETFS is a nov­elty. The BOJ started do­ing it in 2010 as a cat­a­lyst to pro­mote more risk­tak­ing in the econ­omy.

ETFS seemed a suit­able way for the BOJ to pur­chase shares with­out choos­ing one com­pany over an­other. The bank in­vested mainly in funds that track ma­jor in­dexes such as the Topix and the Nikkei 225.

Re­cently, how­ever, pol­i­cy­mak­ers have be­gun us­ing stock pur­chases to in­flu­ence cor­po­rate be­hav­ior. A govern­ment-backed stock in­dex be­gun in 2014 show­cases com­pa­nies the Tokyo bourse sees as the na­tion’s best. Com­pa­nies are se­lected by re­turn on equity and prof­itabil­ity, two ar­eas where Ja­pan Inc. has tra­di­tion­ally fallen short. Ja­pan’s govern­ment pen­sion fund, the world’s largest man­ager of re­tire­ment sav­ings, and the BOJ are among the state in­vestors that have di­rected large sums to this in­dex.

In­vest­ing in a cap­i­tal ex­pen­di­ture ETF would make the BOJ’S nudge a lit­tle harder. Cor­po­rate cash-hoard­ing and stag­nant wages, a re­sponse to 15 years of fall­ing prices, are seen as thwart­ing the bank’s at­tempts to spur growth. Com­pa­nies that spend cash to put their prof­its to work will be re­warded by the BOJ pur­chas­ing their shares via the ETF.

A side ef­fect of the ETF push could be to bring change in Ja­pan’s fi­nan­cial in­dus­try, says Jes­per Koll, head of the new Tokyo of­fice of Wis­domtree In­vest­ments, an ETF man­ager. Most ETFS in Ja­pan track well­known in­dexes. So- called smart beta strate­gies—bas­kets of stocks se­lected for fac­tors such as div­i­dends or prof­itabil­ity—haven’t taken off as they have in the U.S. The BOJ’S move is a wake-up call, says Koll.

Stim­u­lus from the BOJ is a key el­e­ment of Prime Min­is­ter Shinzo Abe’s pol­icy pro­gram, dubbed Abe­nomics. Al­though the cen­tral bank has stemmed de­fla­tion, it is nowhere near its tar­get of 2 per­cent in­fla­tion. (Ris­ris­ing prices would be a sign Ja­pan is re­turn­ing to healthy growth.) With oil prices roil­ing the mar­ket, many in­vestors ex­pect more BOJ as­set pur­chases ahead.

But some worry that the bank’s role in ETFS takes things too far, es­pe­cially if the funds fa­vor cer­tain com­pa­nies. Says Yoshi­hiro Ito, chief strate­gist of Okasan On­line Se­cu­ri­ties in Tokyo: “It’s the same as if the BOJ were buy­ing in­di­vid­ual stocks rather than push­ing up the over­all mar­ket.” The bot­tom line Ja­pan needs cor­po­ra­tions to stop hoard­ing cash. The BOJ thinks an ETF that fa­vors growth-ori­ented com­pa­nies could help.

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