JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225

The last couple of weeks have seen stories carried in the media about the impact of the BOJ in its equity index ETF buying program. Some of these stories point out how the BOJ is now the top shareholder, on a look-through basis, of more Japanese companies than ever before. The Nikkei reported in late June that the BOJ would be considered a top-10 shareholder in 40% of Japan's listed companies and suggested in another title last week "BOJ's huge share purchases cause investor unease."

Another article the week before last noted that Japanese stocks would suffer a "dividend hit" because when March-end dividends are paid out in early July (pay date for the biggest ones is early this week). Theoretically, it is the ex-date which matters not the pay-date. The delta risk comes off on the day before ex-date, which was around the time that article was written. It was a non-event.

The selldown was well-known, as is the buy-in at the end of March when the ETFs have to buy futures into the ex-date for the stock dividends to maintain their NAVs. It has also been arbed for years. Because 80+% of the ETFs which track the big three indices (Nikkei 225, TOPIX, JPX Nikkei 400) are owned by the BOJ, the dividends are received in the trust which owns the ETFs on behalf of the BOJ, and when I asked the BOJ a few years ago "What happens to those dividends?" the answer was, "It goes into the BOJ's income statement" [and is not added to the provisions]. So it does not get reinvested.

The BOJ certainly does own some ETFs. As of the end of June, by my calculations, the BOJ roughly 80.7% of the outstanding ETFs of those three major indices, and a mark-to-market portfolio value of some ¥25.5 trillion.

For kicks I measured the Top 10, Top 5, and #1 shareholder for each of the 2000+ names in TOPIX, and by my calculation, the BOJ's combined look-through holdings would have been a Top 10 shareholder for 1365 TOPIX names according to the Bloomberg public filing data (and therefore 36.3% of the companies listed in Japan). It would have been Top 5 shareholder for 350 names and the number one shareholder for 51 stocks.

That is less of a problem than it looks. The BOJ owns a whopping 4% of listed Japan. That is neither here nor there. It could be higher, it could be zero. If all of listed Japan were float, and all of the indices float-weighted, that would be fine.

The History

The 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 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 year to 31 March 2018 it was ¥5.29 trillion. In the last 6 months it is ¥3.3 trillion - all of regular ETFs.

This is a long insight with some technical detail. You can jump down to the table at the bottom with the "To Buy" and "To Sell" headers. If you own any in the right hand side, beware. If you are short any on the left hand side, beware. It is worth a think of how a change in the Nikkei 225 might affect you.