The Tokyo Whale's $150 Billion ETF Binge Seen Slowing Next Year
(Bloomberg) -- As stocks surge and consumer prices inch higher, investors say it’s time for the Bank of Japan to reduce equity purchases that have been criticized for distorting the market.
Sometime next year, the BOJ will cut its annual buying target for domestic exchange-traded funds by as much as a third from the current 6 trillion yen ($53 billion), says Toru Ibayashi, head of Japanese equities at UBS Wealth Management in Tokyo. Soichiro Monji of Daiwa SB Investments Ltd. expects a similar reduction, but by the end of March.
“Four trillion yen,” UBS’s Ibayashi predicted. “And everybody will understand.”
Conditions have improved drastically since July last year, when the bank virtually doubled its ETF buying goal. Back then, investors were worried about another market downturn following Britain’s vote to leave the European Union. Now, they’re booking profits after Japanese stocks surged to their highest in 26 years, and watching as the economy marks almost a year of mild inflation. The Nikkei 225 Stock Average closed Monday at its highest since 1992.
“Fear of deflation was behind the 6 trillion yen target,” Daiwa SB’s Monji said in an interview. “We’re no longer in that kind of environment. Risks are now skewed toward the upside, rather than the downside. It’s hard for the central bank to justify its buying spree.”
The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg.
Everyone from the head of the country’s stock exchange to the chairman of the Japanese Bankers Association has questioned the ETF program’s size and whether it artificially depresses volatility.
The central bank slowed purchases in October, when the Nikkei 225 rose for 16 straight days, its longest run on record. The bank, which tends to buy on days stocks fall in the morning, purchased only 167 billion yen of ETFs that month, well short of its monthly average of 505 billion yen for the year until September.
Annual buying doesn’t necessarily need to be measured from January to December, BOJ Governor Kuroda said in Nagoya last month, while stressing that the target was for “about” 6 trillion yen a year. He sees no immediate need to adjust the pace of buying, he said. The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.
Ibayashi of UBS says the global economy has entered a positive cycle, allowing central banks around the globe to rein in massive easing programs. To him, the BOJ should be no exception, as companies are increasing capital spending, which he says will replace stimulus measures.
Federal Reserve policy makers are projected to raise the target range for their benchmark interest rate for a third time this year when they meet later this week. The European Central Bank decided in October to reduce monthly asset purchases by half starting in January.
“Given the circumstances at this point in time, it is difficult for the BOJ to keep buying ETFs at six trillion yen per year,” Ibayashi said.
Jonathan Garner, chief Asia and emerging markets equity strategist at Morgan Stanley in Hong Kong, says the ETF purchases have become “perhaps the most controversial part” of the bank’s stimulus program. The BOJ’s measures include everything from negative interest rates and yield-curve control to buying tens of trillions of yen of bonds each year, on top of its stock purchases.
“The current easing program is a bit too much,” said Kazuyuki Terao, chief investment officer at Allianz Global Investors Japan Co. “A bullish market presents a window for the BOJ to decrease its purchases.”
Naoki Kamiyama, chief strategist for Nikko Asset Management Co. in Tokyo, and Hisao Matsuura, a strategist at Nomura Holdings Inc., say the BOJ won’t cut its ETF target anytime soon. For them, the bank is still far from its 2 percent inflation goal, and market distortion is less of a concern. While the BOJ owns about three-quarters of Japanese ETFs, that’s less than 4 percent of the stock market.
“Why would the BOJ change?” Kamiyama said. “It would hurt investor confidence and make a pickup in inflation much less likely.”
But Ibayashi and Monji say any cutback in ETF buying wouldn’t hurt the economy or prices. Spending 4 trillion yen a year is plenty, according to Ibayashi, who expects the bank to promise to step in again when needed if it does lower the target.
“We don’t have 2 percent inflation yet but we’re headed towards it,” Monji said. “That’s a reason to reduce the scale a bit. There’s no need to wait."
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