Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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.<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>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. By my calculations, the BOJ is up something over ¥7 trillion. <h2>The History</h2>The history is that in 2010 the Bank of Japan started buying ETFs in order to implement quantitative easing. <ul><li>The original Asset Purchase Plan 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 ¥3 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 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). </li><li>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. </li><li>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). </li></ul><div class="content-highlight">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. 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.<ol><li>The BOJ will significantly amend its purchase patterns...        OR</li><li>The committee which manages the Nikkei 225 Average will change the methodology.</li></ol>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. </div>More below.

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

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...

Travis Lundy

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