Haruhiko Kuroda
At a conference last month in Tokyo celebrating Japan’s exchange-traded funds, the biggest buyer was nowhere to be seen.
“I think they registered, but I’m not sure if they’re attending,” Kana Kawasaki, who works for the event organiser S&P Dow Jones Indices, said from the floor of the Imperial Hotel in the centre of the city.
She was referring to officials from the Bank of Japan, whose low profile belies its influence in a market where it owned six trillion yen ($49.9-billion) of exchange-traded funds (ETFs), about half of those trading in Japan as of the most recent bourse data. Passive investments are the vehicle of choice for the central bank as it tries to stimulate the economy without favouring specific companies.
The foray into the stock market is sparking a boom that, helped by a near doubling of stock prices, has swelled ETF assets by 159% over two years and jacked up profits for managers running the funds.
Now, with inflation continuing to fall short of the Bank of Japan’s target, analysts are expecting governor Haruhiko Kuroda to expand easing and pump more cash into equities.
“When you ask who we should thank for this, in Japan it’s Prime Minister [Shinzo] Abe and governor Kuroda,” Hibiki Muneta, director of investment at Simplex Asset Management, which oversees about $2-billion of ETFs, told the crowd at the conference on April 2. “If it wasn’t for them, our assets wouldn’t be at this level.”
Central banks venturing into markets to buy securities like bonds isn’t unusual – the Federal Reserve and the Bank of England have both done so. Buying stocks with ETFs, however, is unique. The Bank of Japan started doing it in 2010 as a catalyst to spur more trading and promote “more risk-taking activity in the overall economy”, the bank said.
End goal
Not everyone sees how ETF buying will spur inflation, the broad objective of Kuroda’s stimulus measures. Maiko Noguchi, an economist at Daiwa Securities Group and a former official at the central bank, said it’s fine to bolster investors’ sentiment and even push up share prices.
“But that’s not their end goal,” Noguchi said. “They’re ultimately pursuing inflation. So the question is, how do the two connect? And it’s a little hard to find a straightforward answer to that.”
With inflation barely eking out a gain in March, 23 of 34 economists surveyed by Bloomberg expect the central bank to ease more by the end of October. Having stretched the stimulus programme so far that the Bank of Japan can already buy every new bond issued by the government each month, further expansion means the central bank may have to focus on other securities.
Market share
The Bank of Japan didn’t respond to questions about the programme’s goals. In March, Kuroda said the amount of ETFs the central bank buys is extremely small. Although its holdings account for about half the ETF market, they’re still a fraction of the Tokyo bourse’s main board, valued at about 580-trillion yen, according to data compiled by Bloomberg.
For ETF managers, Kuroda has been a godsend. Originally limited to about 450-billion yen when started in October 2010, the Bank of Japan’s programme was due to expire by about the end of 2011. After several extensions, buying began to swell under Kuroda, who expanded purchases to one trillion yen a year in April 2013 before tripling them in October.
Assets in the 17 funds the central bank is permitted to have more than doubled since Kuroda’s first round of easing. Growth has been concentrated in those funds, which accounted for about 85% of the industry’s $101-billion of assets in Japan as of February 10, Bloomberg and exchange data show.
Nomura benefits
“After the BOJ [Bank of Japan] started buying, newspapers began writing about it and suddenly people became aware of ETFs,” said Junichi Honda, head of the ETF department at UBS Global Asset Management in Tokyo. “For those of us working in the industry, it was a real life-saver.”
The biggest beneficiary has been the money-management arm of Nomura Holdings Assets in three funds that the Bank of Japan is eligible to buy when these jumped to 5.4-trillion yen at the end of March, up 123% from two years earlier, data compiled by Bloomberg show. The unit of Japan’s biggest brokerage was the world’s seventh-largest ETF provider as of February, up from a ranking of ninth in 2013, according to BlackRock.
Like other fund managers, Nomura charges investors a management fee on its ETFs that amounts to about 0.2% of assets. Based on that maths, revenue from such fees probably climbed to a record 9.1-billion yen in the year ended March, according to Bloomberg data. Nomura’s overall revenue in the fiscal year ended March shrank by 12% from two years ago, whereas its asset-management unit recorded a gain of 34%.
Other buyers
Not all the industry’s growth is attributable to the Bank of Japan. ETFs on the central bank’s balance sheet expanded by 4.1-trillion yen in the two years to February, accounting for 69% of inflows to the funds it can buy, according to calculations by Bloomberg based on Tokyo stock exchange data. The rest can probably be attributed to institutional investors, said Jason Miller, head of BlackRock’s Japan ETF unit.
“Clearly, they’re having a significant impact,” said Miller of the central bank. “But there’s still considerable growth underneath the BOJ buying programme.”
Large lenders, insurers and regional banks have been purchasing his Nikkei 225 Stock Average fund, he said. BlackRock started an ETF linked to the JPX-Nikkei Index 400 in December, two months after the central bank said it would buy funds tracking the measure.
Other asset managers are expanding. Sumitomo Mitsui Asset Management started its own Nikkei 225 ETF in March and Diam did the same in January.
Boost ahead
Analysts at Nomura predicted in March that the Bank of Japan will double ETF purchases to six trillion yen a year in October.
The boost could be short-lived. In the same report, Nomura said it expects the Bank of Japan to begin reducing the scale of buying sometime after October 2016. For Koei Imai, who oversees $23-billion of ETFs at Nikko Asset Management, this is no reason for concern.
“In such a scenario, the Japanese economy should actually be doing well and capital markets should be robust,” said Imai. “Yes, there may be impact on supply and demand, but by the time they’re seriously considering this, I’d think the market will be doing exceptionally well.” – © Bloomberg