Bank of Japan enters ETF market

ETFs are so hot, even the Bank of Japan is getting into the market.

The BOJ in December told Japan’s fund management industry to launch exchange traded funds, better known as ETFs, that will help further the government’s growth policies and the central bank’s massive monetary easing program, reported the Financial Times.

BOJ logoAnd on Thursday that finally comes to fruition when two of the three new “physical and human capital” ETFs will hit the market. The BOJ will be the biggest buyer because it needs more assets to satisfy its plan to buy 32 billion yen worth of ETFs each month. Already, the BOJ has bought 50% of Japan’s 15 trillion yen “plain vanilla” market.

In addition to helping Japan’s quantitative easing program, designed to banish almost two decades of deflation, the funds aim to further Prime Minister Shinzo Abe’s growth program by investing in companies that increase workers’ wages and capital expenditure, said the FT.

Since the BOJ can’t hold more than 50% of the shares of any ETFs, other buyers will be required to purchase the remainder. Brokers suggest regional banks and pension funds will be the biggest private sector buyers. However, fund managers say investors may not find the products compelling.

“Probably if it had just been left to common sense, the market wouldn’t have thought about [creating these indices],” Makoto Shiota, head of ETF marketing at Nomura Securities told the FT. “But in this case the BOJ is working from a macro perspective to try to help the economy to raise wages, increase consumption and boost capital investment. That is how these ETF products came about.”

Last December, the BOJ said it would purchase an additional 300 billion yen per year of a suite of ETFs that would investment in companies that use their collective 355 trillion yen of cash to increase capital spending, raise wages and show “a commitment to truly understanding and practicing governance at an international standard.” Currently, this behavior remains atypical across large swaths of corporate Japan but is deemed vital to Abe’s plans to revitalize the world’s third-biggest economy.

At the time the products did not exist and analysts said the BOJ was meddling in the equity markets even as index providers struggled to create indices that would not immediately flounder.

The problem is stocks with heavy capital expenditure (capex) tend to underperform, pay data are not routinely disclosed publicly and capex is widely divergent between sectors.

However, the BOJ focused on including these aspects in the creation of the new funds as an incentive to get companies to raise wages and capex.

The BOJ’s strategy was to force Japan’s conservative asset management industry to become better propellants of corporate change, Jesper Koll, the head of Wisdom Tree in Japan, told the Financial TImes.

“What the BOJ is doing is dangling a carrot in front of the industry and saying ‘get creative — go crazy, and show us what you can do’,” said Koll.

 



Categories: Asia Unhedged, Japan

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