(Bloomberg) -- As the Bank of Japan keeps up its purchases of exchange-traded funds, there are signs it’s fighting against the tide.
Inflows into the nation’s stock mutual funds fell in July to the lowest since November 2012, the month before Prime Minister Shinzo Abe came to power, and hovered near that level in August, according to data from the Investment Trusts Association in Japan. This shows individuals aren’t using the BOJ’s purchases as a reason to take on more risk. The central bank almost doubled its annual budget for ETFs to 6 trillion yen ($59 billion) this summer and maintained that pace after its meeting on Wednesday.
Analysts see three reasons:
- A slumping stock market. The Topix index is down 13 percent this year, despite Wednesday’s 2.7 percent rally
- Less incentive to shift from cash as the BOJ fails to spur inflation that would erode its value
- Regulatory scrutiny of selling of a popular type of mutual fund that offers regular dividends but sometimes pays them partly from investors’ principal
“When it’s not making steady, continuous gains, the market doesn’t seem an attractive investment, especially to older people,” said Nobuyuki Fujiwara, head of the product development and research institute at Deutsche Asset Management Ltd. in Tokyo. “People started to invest because they’d thought that inflation may actually reach 2 percent with Abenomics. But they’re starting to think that might be impossible.”
The Topix index is heading for its first annual decline in five years after doubling earlier in Abe’s term, as the yen surges even after the BOJ introduced negative interest rates. Japanese stocks are the third-worst performers this year among 24 developed markets tracked by Bloomberg, despite buying by the BOJ and the nation’s $1.3 trillion pension fund. The benchmark gauge fell 0.2 percent on Friday after a national holiday Thursday.
Inflows to publicly offered Japan stock mutual funds fell to 2.2 trillion yen in July, from a peak of 5.2 trillion yen in May 2013 at the height of optimism about Abe’s plans to spur inflation and revive the flagging economy. They stood at 2.3 trillion yen last month. The average 2.4 trillion yen figure for the first eight months of the year is also the lowest for the period since 2012. The figures from the Investment Trusts Association include open and closed-ended mutual funds but not ETFs.
Given individual investors’ reluctance to take on risk, inflows into mutual funds are likely to keep declining in the quarter ending September, Wataru Otsuka, an analyst at Nomura Holdings Inc., wrote in a report dated Sept. 15.
Consumer prices excluding fresh food dropped 0.5 percent in July from a year earlier, a fifth straight month of declines that sent the BOJ further from its 2 percent inflation target.
The central bank announced adjustments to its stimulus program on Wednesday, which include buying more ETFs linked to the market-capitalization weighted Topix and reducing those tied to the Nikkei 225, which ranks companies according to the price of one share. Shares in Tokyo jumped after the announcement, led by lenders after the central bank refrained from making deeper cuts to negative interest rates.
Belief that the BOJ would achieve its price objective helped send investors into the stock market in the earlier years of Abe’s term, Fujiwara said. Japanese households had just 9 percent of their financial assets in equities at the end of March 2016, according to BOJ flow of funds data, compared with 35 percent in the U.S. as of the same date and 17 percent in the Euro area at the end of last year.
The Financial Services Agency, Japan’s market regulator, pointed out in August that only 37 percent of investors who held a type of mutual fund that pays monthly dividends understood that those dividends were sometimes paid in part from their principal. The FSA said most of the best-selling mutual funds in Japan as of March were such vehicles.
While the FSA hasn’t imposed clear restrictions on dividend payouts from such funds, brokerages and trust banks have been lowering them anyway, partly because of the comments from the regulator, according to Fujiwara, who says the FSA is taking the right approach to ensuring the long-term growth of the mutual fund industry.
All this means that individual investors don’t view the BOJ’s increased equity purchases as a reason to buy, and Fujiwara sees little sign of that changing soon.
“It’ll be difficult to see inflows return to levels in 2013 and 2014,” he said. “If we start to see at least a gradual weakening in the yen and a recovery in the stock market, investors may come back to the mutual fund market.”