IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Daiwa House Reit Investment / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/daiwa-house-reit-investment-cb077099-8006-45e4-83cf-6ac7f19cd384" target="_blank" data-smartkarma-citation="entities:11283:1" rel="noopener">Daiwa House Reit Investment (8984 JP)</a> (DHR) unveiled plans to raise up to JPY34.3 billion ($313 million) through a primary offering (121,000 units), a secondary offering (9,000 units) and third-party allotment (9,000 units). The pricing date is between 19 February and 26 February 2020. </p><div class="content-highlight"><p>The proceeds from the placement will be used to will partly fund the JPY70.8 billion ($645 million) acquisitions of three properties. Overall, we would be tempted to participate in the placement as DHR’s valuation more than compensates for the modest DPU accretion.</p></div>

Daiwa House Reit Investment (8984 JP) (DHR) unveiled plans to raise up to JPY34.3 billion ($313 million) through a primary offering (121,000 units), a secondary offering (9,000 units) and third-party allotment (9,000 units). The pricing date is between 19 February and 26 February 2020. The proceeds from the placement will be used to will partly fund the JPY70.8 billion ($645 million) acquisitions of three properties. Overall, we would be tempted to participate in the placement as DHR’s valuation more than compensates for the modest DPU accretion.

Daiwa House REIT Placement: Valuation Rather Accretion Is the Key Positive

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/347/original/2019-04-20_09-59-40.png?1555722056" class="editor-image img-responsive" data-smartkarma-image-id="85347"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>UnCh</strong> - Japanese equities are unchanged in US dollar terms over both three and six months. The Bank of Japan has intervened on 42 of the 121 trading days since October 22nd or an average of 1.6 times a week as foreigners remain underweight. As corporate results and macro data continue to disappoint, the outlook for the market is muted ahead of the upcoming ten-day holiday which combines the traditional Golden Week holidays with the accession of the new Emperor and the beginning of the Reiwa era (令和時代).  </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/405/original/2019-04-21_07-28-03.png?1555799330" class="editor-image img-responsive" data-smartkarma-image-id="85405"></figure><div class="content-caption">Source: Investing.com</div><p><strong>CURRENCY RISK?</strong> - "UnCh" also applies to <a href="https://www.smartkarma.com/entities/22826" target="_blank" data-smartkarma-citation="entities:22826:1">JPY (USDJPY CURNCY)</a>  Implied volatility for 9-month USDJPY options reached a new 25-year low last week of 6.11. The previous two lows were in 2006 and 2015 and were followed by periods of sustained Yen strength. The equity market currently appears to be discounting precisely the opposite.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/350/original/2019-04-20_10-21-58.png?1555723331" class="editor-image img-responsive" data-smartkarma-image-id="85350"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>VTR</strong> - The ratio of the value of stocks traded to the total market value continues to decline. The average for 2019 is 11% below that for the same period last year and is unchanged at 39bps in each month year-to-date.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/381/original/2019-04-20_14-34-11.png?1555738458" class="editor-image img-responsive" data-smartkarma-image-id="85381"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>VOLUME SCORE TIMELINE</strong> - Volumes have been highest in the <strong>Internet</strong>, <strong>Retail</strong>, and<strong> Telecoms</strong> sectors, while the <strong>Materials</strong>,<strong> Transportation</strong>, <strong>Utilities</strong> and<strong> Real Estate</strong> Sectors have seen the lowest.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/352/original/2019-04-20_10-29-59.png?1555723806" class="editor-image img-responsive" data-smartkarma-image-id="85352"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>LOWS &gt; HIGHS</strong> - With a deficit of positive news at the individual company level, the number of new 52-week highs has exceeded the number of new 52-week lows on only one-third of the last 31 trading days. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/363/original/2019-04-20_12-34-06.png?1555731278" class="editor-image img-responsive" data-smartkarma-image-id="85363"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>DRIFTING LOWER</strong> - TTM and Forecasts Aggregate Operating and Net Income continue to drift lower ahead of the full-year results for March year-end companies which are due in a more-concentrated-than-usual period either side of the long break.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/384/original/2019-04-20_17-30-47.png?1555749055" class="editor-image img-responsive" data-smartkarma-image-id="85384"></figure><div class="content-caption">Source: Japan Analytics <p></p>
</div><p><strong>MIND THE GAP</strong> - Based on our Scoring methodology for aggregate Results &amp; Revisions, the 'gap' between total market value and earnings momentum is now as wide as at the two previous 'peaks' in January 2018 and September 2018.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/435/original/File%202019-04-21%2015%2055%2018.jpeg?1555829876" class="editor-image img-responsive" data-smartkarma-image-id="85435"></figure><div class="content-caption">Source: Bank of America Merrill Lynch</div><p><strong>GLOBAL WAVE</strong> - The market is implying that the earnings cycle is close to a bottom which is in accord with BAML's Global Earnings Revision Ratio having ticked up last month for the first time in 14 months. BAML has yet to call a Trough in their Global Wave and, were they to do so, such a Trough would be the first above '50' since 2006.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/378/original/2019-04-20_14-00-43.png?1555736454" class="editor-image img-responsive" data-smartkarma-image-id="85378"></figure><p><strong>FORECASTS LEADING EARNINGS LOWER</strong> - Separating our the Results Score and the Forecast &amp; Revision Score, the latter is continuing to lead the former to the downside, although both Scores are in aggregate still positive. Reported earnings and forecasts are still growing year-on-year; however, the momentum is slowing rapidly.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/379/original/2019-04-20_14-04-23.png?1555736670" class="editor-image img-responsive" data-smartkarma-image-id="85379"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>INTERIM LEADING ANNUAL LOWER</strong> -  Between February and September in each year, there is a statistically significant number of Interim Forecasts that they can be compared to the Annual Forecasts with which they are combined to derive the score in the previous chart. Interim Forecasts are often prepared by the divisional heads are not accorded the same 'reverence' as the Annual Forecasts. As a result, the Interim numbers offer a good leading indicator of short-term trends. In recent weeks, the aggregate Interim Forecast/Revision Score has turned sharply lower and is now at the lowest point in almost two years.   </p><p>In the <strong>DETAIL</strong> section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/14191" target="_blank" data-smartkarma-citation="entities:14191:1">Koshidaka (2157 JP)</a>, <a href="https://www.smartkarma.com/entities/2765" target="_blank" data-smartkarma-citation="entities:2765:1">Ryohin Keikaku (7453 JP)</a>, <strong>Drugstores</strong>, <a href="https://www.smartkarma.com/entities/237" target="_blank" data-smartkarma-citation="entities:237:1">Daiwa House (1925 JP)</a>, <strong>Toyota Parts companies</strong>, and <a href="https://www.smartkarma.com/entities/2" target="_blank" data-smartkarma-citation="entities:2:1">Yamato Holdings (9064 JP)</a>.</p>

Source: Japan AnalyticsUnCh - Japanese equities are unchanged in US dollar terms over both three and six months. The Bank of Japan has intervened on 42 of the 121 trading days since October 22nd or an average of 1.6 times a week as foreigners remain underweight. As corporate results and macro data continue to disappoint, the outlook for the market is muted ahead of the upcoming ten-day holiday which combines the traditional Golden Week holidays with the accession of the new Emperor and the beginning of the Reiwa era (令和時代).  Source: Investing.comCURRENCY RISK? - "UnCh" also applies to JPY (USDJPY CURNCY)  Implied volatility for 9-month USDJPY options reached a new 25-year low last week of 6.11. The previous two lows were in 2006 and 2015 and were followed by periods of sustained Yen strength. The equity market currently appears to be discounting precisely the opposite.   Source: Japan AnalyticsVTR - The ratio of the value of stocks traded to the total market value continues to decline. The average for 2019 is 11% below that for the same period last year and is unchanged at 39bps in each month year-to-date.Source: Japan AnalyticsVOLUME SCORE TIMELINE - Volumes have been highest in the Internet, Retail, and Telecoms sectors, while the Materials, Transportation, Utilities and Real Estate Sectors have seen the lowest.Source: Japan AnalyticsLOWS &gt; HIGHS - With a deficit of positive news at the individual company level, the number of new 52-week highs has exceeded the number of new 52-week lows on only one-third of the last 31 trading days. Source: Japan AnalyticsDRIFTING LOWER - TTM and Forecasts Aggregate Operating and Net Income continue to drift lower ahead of the full-year results for March year-end companies which are due in a more-concentrated-than-usual period either side of the long break.   Source: Japan Analytics 
MIND THE GAP - Based on our Scoring methodology for aggregate Results &amp; Revisions, the 'gap' between total market value and earnings momentum is now as wide as at the two previous 'peaks' in January 2018 and September 2018.Source: Bank of America Merrill LynchGLOBAL WAVE - The market is implying that the earnings cycle is close to a bottom which is in accord with BAML's Global Earnings Revision Ratio having ticked up last month for the first time in 14 months. BAML has yet to call a Trough in their Global Wave and, were they to do so, such a Trough would be the first above '50' since 2006.FORECASTS LEADING EARNINGS LOWER - Separating our the Results Score and the Forecast &amp; Revision Score, the latter is continuing to lead the former to the downside, although both Scores are in aggregate still positive. Reported earnings and forecasts are still growing year-on-year; however, the momentum is slowing rapidly.Source: Japan AnalyticsINTERIM LEADING ANNUAL LOWER -  Between February and September in each year, there is a statistically significant number of Interim Forecasts that they can be compared to the Annual Forecasts with which they are combined to derive the score in the previous chart. Interim Forecasts are often prepared by the divisional heads are not accorded the same 'reverence' as the Annual Forecasts. As a result, the Interim numbers offer a good leading indicator of short-term trends. In recent weeks, the aggregate Interim Forecast/Revision Score has turned sharply lower and is now at the lowest point in almost two years.   In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Koshidaka (2157 JP), Ryohin Keikaku (7453 JP), Drugstores, Daiwa House (1925 JP), Toyota Parts companies, and Yamato Holdings (9064 JP).

🇯🇵 Japan • Fortnightly Update - "UnCh"

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Last week in <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a> I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. </p><h2>NOT, MAYBE, and LIKELY Problems</h2><p><strong>NOT A PROBLEM:</strong> The fact that the BOJ owned 80.7% of the ETFs outstanding at the end of June.</p><p><strong>MAYBE A PROBLEM:</strong> The fact that BOJ-owned ETFs own 15% or more of 6 names on a look-through basis and more than 10% of 30+ names looks a bit odd.</p><p><strong>LIKELY A PROBLEM:</strong> Based on June month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank">previous insight</a>), over the next 12 months the BOJ would purchase 16-18% of the remaining real float in Fast Retailing, and even more of <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart UNY Holdings Co Ltd (8028 JP)</a>, as well as more than 5% of the remaining float of a half dozen other names in its ETF ownership universe.</p><h2>What To Do?</h2><p>The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. </p><p>That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.</p>

Last week in JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225 I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. NOT, MAYBE, and LIKELY ProblemsNOT A PROBLEM: The fact that the BOJ owned 80.7% of the ETFs outstanding at the end of June.MAYBE A PROBLEM: The fact that BOJ-owned ETFs own 15% or more of 6 names on a look-through basis and more than 10% of 30+ names looks a bit odd.LIKELY A PROBLEM: Based on June month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the previous insight), over the next 12 months the BOJ would purchase 16-18% of the remaining real float in Fast Retailing, and even more of FamilyMart UNY Holdings Co Ltd (8028 JP), as well as more than 5% of the remaining float of a half dozen other names in its ETF ownership universe.What To Do?The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.

JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes

<p>One week ago in <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a> I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. </p><h2>NOT, MAYBE, and LIKELY Problems</h2><p><strong>NOT A PROBLEM:</strong> The fact that the BOJ owned 80.3% of the ETFs outstanding at the end of January (now higher because the BOJ has spent an additional 292.4bn yen in the first seven trading days of February) is not a problem. </p><p><strong>MAYBE A PROBLEM:</strong> The fact that BOJ-owned ETFs own 18% of <a href="https://www.smartkarma.com/entities/18107" target="_blank" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a> and 16.3% of <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing Co Ltd (9983 JP)</a> <em>may</em> be a problem. </p><p><strong>LIKELY A PROBLEM:</strong> Based on January month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank">previous insight</a>), over the next 12 months the BOJ would purchase 18.3% of the remaining float in Fast Retailing, 8.7% of the remaining float in <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart UNY Holdings Co Ltd (8028 JP)</a>, 6.2% of the remaining float in <a href="https://www.smartkarma.com/entities/13236" target="_blank" data-smartkarma-citation="entities:13236:1">Konami Holdings Corp (9766 JP)</a>, and 5+% of the remaining float of five other stocks.</p><h2>What To Do?</h2><p>The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. </p><p>Last week, the proposed dollar-weighted long basket outperformed the proposed DW short basket every day of the week, with the 50-name long basket outperforming the 40-name short basket by 4.8%. On an equal-weighted basis, the proposed long basket outperformed the short basket four days out of five for 2.9% outperformance. </p><p>That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.</p>

One week ago in The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards? I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. NOT, MAYBE, and LIKELY ProblemsNOT A PROBLEM: The fact that the BOJ owned 80.3% of the ETFs outstanding at the end of January (now higher because the BOJ has spent an additional 292.4bn yen in the first seven trading days of February) is not a problem. MAYBE A PROBLEM: The fact that BOJ-owned ETFs own 18% of Advantest Corp (6857 JP) and 16.3% of Fast Retailing Co Ltd (9983 JP) may be a problem. LIKELY A PROBLEM: Based on January month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the previous insight), over the next 12 months the BOJ would purchase 18.3% of the remaining float in Fast Retailing, 8.7% of the remaining float in FamilyMart UNY Holdings Co Ltd (8028 JP), 6.2% of the remaining float in Konami Holdings Corp (9766 JP), and 5+% of the remaining float of five other stocks.What To Do?The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. Last week, the proposed dollar-weighted long basket outperformed the proposed DW short basket every day of the week, with the 50-name long basket outperforming the 40-name short basket by 4.8%. On an equal-weighted basis, the proposed long basket outperformed the short basket four days out of five for 2.9% outperformance. That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.

<p>Just over six months ago, a breathless article on Bloomberg noted that according to their calculations, the BOJ owned 71% of the ETFs in the market.</p><p>I had it higher than that, but I noted that the level itself was not a problem. My latest calculations show that at the end of January 2018, the number appears to be more like 80.3%. That is STILL not a problem. </p><p>But that does not mean there aren't problems.</p><p>Based on the stated rules of how the BOJ would purchase the ETFs as those rules have evolved over time, the history of BOJ ownership is shown in the chart below. That has resulted in the BOJ owning ¥12.78trln of TOPIX ETFs, ¥10.41trln of Nikkei 225, and ¥538bn of JPX-Nikkei 400 ETFs as of 31 January 2018.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/043/581/original/Screen%20Shot%202018-02-01%20at%205.24.59%20PM.png?1517477672" class="editor-image img-responsive" data-smartkarma-image-id="43581"></figure><div style="text-align: left;" class="content-caption">data: Bank of Japan, JPX, Bloomberg, Travis Lundy</div><p>As of the end of January 2018, the BOJ had spent, by my calculation, ¥17.35 trillion since mid-December 2010 on TOPIX, Nikkei225, and JPX-Nikkei400 ETFs (plus ¥539 billion in "ETFs to support investment in physical and human capital") and had received well in excess of ¥600 billion in dividends over time. </p><p>By my calculations, the BOJ is up something over ¥7 trillion. </p><h2>The History</h2><p>The history is that in 2010 the Bank of Japan started buying ETFs in order to implement quantitative easing. </p><ul><li>The original <em>Asset Purchase Plan</em> announced in the <a href="http://www.boj.or.jp/en/announcements/release_2010/k101105.pdf" target="_blank">release</a> of the November 5, 2010 Monetary Policy Meeting stated that the BOJ would purchase TOPIX and Nikkei 225 ETFs in the market (at VWAP) at a rate of ¥1.0 trillion/year, purchasing ETFs in a ratio to their outstanding notional (with some subtle aspects related to trading volume and frequency). The BOJ would also purchase J-REITs.</li><li>At the "Big Bazooka" meeting of October 31, 2014, the <a href="http://www.boj.or.jp/en/announcements/release_2014/k141031a.pdf" target="_blank">release</a> noted the ETF purchase quantity was lifted to <em>¥3</em> trillion per annum and the BOJ said it would start purchasing ETFs tracking the JPX-Nikkei 400 Index. </li><li>In late July 2016, the BOJ <a href="https://www.boj.or.jp/en/announcements/release_2016/k160729a.pdf" target="_blank">announced</a> the results of its Monetary Policy Committee meeting and announced a <em>further</em> increase in ETF buying to ¥5.7 trillion a year of "regular ETFs" (TOPIX, Nikkei 225, and JPX-Nikkei 400 Index-tracking ETFs) and ¥300 billion/year of "ETFs to support investment in physical and human capital", purchases of which had commenced in April at a slightly lower pace (but now continue at a pace of ¥1.2bn a day - every day). </li><li>In September 2016, the BOJ announced that it would <em>twist</em> its ETF buys so that the <em>original</em> ¥3 trillion would be split amongst TOPIX, Nikkei 225, and JPX-Nikkei 400 according to the methodology prior to July, whereas the <em>additional</em> ¥2.7trln/year would be all TOPIX. </li><li>The BOJ continues to purchase ETFs at the rate of <em>roughly</em> ¥5.7 trillion a year. In the year between 1 April 2016 and 31 March 2017, the BOJ purchased ¥5.29 trillion. In the last ten months, the BOJ has purchased ¥4.486 trillion, and the last three months have seen purchases of ¥1.519 trillion indicating a monthly average of ¥506bn. On that pace, the BOJ will finish this fiscal year at roughly ¥5.5 trillion (plus the ¥300bn for the physical/human capital ETFs and more for J-REITs). </li></ul><div class="content-highlight"><p>What is done is done. What might be more interesting is what to come. The significant issues were previewed in my insight <a href="https://www.smartkarma.com/insights/fast-retailing-still-squeezable" target="_blank" data-smartkarma-citation="insights:16756">Fast Retailing:  Still Squeezable</a> three weeks ago. </p><p>We know from various media reports from 6-18 months ago that there are murmurings inside the BOJ about the possible market impact of its ETF buying. In the past, when BOJ Governor Kuroda has been asked about this topic in a general way, he has stated that the BOJ could alter its methods if it became a problem. </p><p>Looking forward, it is pretty close to being a problem. I continue to think that one of two things is likely before long.</p><ol><li>The BOJ will <em>significantly</em> amend its purchase patterns...        OR</li><li>The committee which manages the Nikkei 225 Average will change the methodology.</li></ol><p>The first would solve some issues, but not all of them. </p><p><em><strong>The second would solve most of the past and future issues, and would be really, really interesting.</strong></em></p><p><em><strong>To do it right would mean (at current levels) a gross rebalance trade of US$70 billion, with 15 different stocks seeing a US$1 billion flow, and one name seeing (as of now) an $8bn flow. But it would solve the BOJ's "problems" regarding ETF impact on the market and single names for years to come. </strong></em></p></div><p>More below.</p>

Just over six months ago, a breathless article on Bloomberg noted that according to their calculations, the BOJ owned 71% of the ETFs in the market.I had it higher than that, but I noted that the level itself was not a problem. My latest calculations show that at the end of January 2018, the number appears to be more like 80.3%. That is STILL not a problem. But that does not mean there aren't problems.Based on the stated rules of how the BOJ would purchase the ETFs as those rules have evolved over time, the history of BOJ ownership is shown in the chart below. That has resulted in the BOJ owning ¥12.78trln of TOPIX ETFs, ¥10.41trln of Nikkei 225, and ¥538bn of JPX-Nikkei 400 ETFs as of 31 January 2018.data: Bank of Japan, JPX, Bloomberg, Travis LundyAs of the end of January 2018, the BOJ had spent, by my calculation, ¥17.35 trillion since mid-December 2010 on TOPIX, Nikkei225, and JPX-Nikkei400 ETFs (plus ¥539 billion in "ETFs to support investment in physical and human capital") and had received well in excess of ¥600 billion in dividends over time. By my calculations, the BOJ is up something over ¥7 trillion. The HistoryThe history is that in 2010 the Bank of Japan started buying ETFs in order to implement quantitative easing. The original Asset Purchase Plan announced in the release of the November 5, 2010 Monetary Policy Meeting stated that the BOJ would purchase TOPIX and Nikkei 225 ETFs in the market (at VWAP) at a rate of ¥1.0 trillion/year, purchasing ETFs in a ratio to their outstanding notional (with some subtle aspects related to trading volume and frequency). The BOJ would also purchase J-REITs.At the "Big Bazooka" meeting of October 31, 2014, the release noted the ETF purchase quantity was lifted to ¥3 trillion per annum and the BOJ said it would start purchasing ETFs tracking the JPX-Nikkei 400 Index. In late July 2016, the BOJ announced the results of its Monetary Policy Committee meeting and announced a further increase in ETF buying to ¥5.7 trillion a year of "regular ETFs" (TOPIX, Nikkei 225, and JPX-Nikkei 400 Index-tracking ETFs) and ¥300 billion/year of "ETFs to support investment in physical and human capital", purchases of which had commenced in April at a slightly lower pace (but now continue at a pace of ¥1.2bn a day - every day). In September 2016, the BOJ announced that it would twist its ETF buys so that the original ¥3 trillion would be split amongst TOPIX, Nikkei 225, and JPX-Nikkei 400 according to the methodology prior to July, whereas the additional ¥2.7trln/year would be all TOPIX. The BOJ continues to purchase ETFs at the rate of roughly ¥5.7 trillion a year. In the year between 1 April 2016 and 31 March 2017, the BOJ purchased ¥5.29 trillion. In the last ten months, the BOJ has purchased ¥4.486 trillion, and the last three months have seen purchases of ¥1.519 trillion indicating a monthly average of ¥506bn. On that pace, the BOJ will finish this fiscal year at roughly ¥5.5 trillion (plus the ¥300bn for the physical/human capital ETFs and more for J-REITs). What is done is done. What might be more interesting is what to come. The significant issues were previewed in my insight Fast Retailing:  Still Squeezable three weeks ago. We know from various media reports from 6-18 months ago that there are murmurings inside the BOJ about the possible market impact of its ETF buying. In the past, when BOJ Governor Kuroda has been asked about this topic in a general way, he has stated that the BOJ could alter its methods if it became a problem. Looking forward, it is pretty close to being a problem. I continue to think that one of two things is likely before long.The BOJ will significantly amend its purchase patterns...        ORThe committee which manages the Nikkei 225 Average will change the methodology.The first would solve some issues, but not all of them. The second would solve most of the past and future issues, and would be really, really interesting.To do it right would mean (at current levels) a gross rebalance trade of US$70 billion, with 15 different stocks seeing a US$1 billion flow, and one name seeing (as of now) an $8bn flow. But it would solve the BOJ's "problems" regarding ETF impact on the market and single names for years to come. More below.

The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?

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