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A Japanese national flag flies at the Bank of Japan headquarters in Tokyo.
Photo:
kimimasa mayama / European Pressphoto Agency
The Open Market Committee of the Federal Reserve will meet this week and on Wednesday we will know if it will expand its purchases of Treasury bonds and private bonds. Which makes it a good time to point out that the Bank of Japan is now the largest owner of shares in that country. This is a milestone worth marking, as it will inevitably increase pressure on other central banks to follow in the footsteps of Japan’s overly innovative monetary authorities.
The BOJ’s holdings of exchange-traded funds reached 45 trillion yen ($ 432 billion) in November, calculates Shingo Ide of the NLI Research Institute. Ide estimates that the BOJ owns about 7% of the shares listed by market capitalization. The Government Pension Investment Fund (GPIF), which can buy shares in the company without going through ETFs, also owns about 7% of the market capitalization.
That’s a big chunk of an economy’s stock that will be owned by two entities, especially government-controlled entities. And that figure understates the influence this property creates for the government on Japan’s seemingly private economy. An analysis by Nikkei in 2016 found that one or other of the government investors directly or through ETF holdings was among the top 10 shareholders of 96% of publicly traded companies. The BOJ owns approximately 90% of all ETFs in Japan.
No one knows how this is affecting the Japanese market or economy. Hopefully it will have some effect, and there is evidence that investors sometimes spend more time gambling with or against the central bank than perusing corporate financial statements. The BOJ has been buying ETFs for a decade and changes in its investment strategy, such as buying more ETFs that include stocks in smaller companies, have caused share prices to rock.
Traders seem to believe that the BOJ and GPIF are not currently influencing the market, in part because Japan’s stock market has not consistently outperformed anyone else’s. But it is difficult to say how much the market would have fallen, or how high it could have risen, without this intervention. The GPIF, for example, does not lend its shares to short sellers.
There is also increasing concern about distortions in the ETF market. These funds have proven popular with retail investors in other countries. But the BOJ’s practice of buying from all asset managers has silenced the competition, especially in the fees managers charge. Management fees for the largest ETFs that track the Topix index stand at 0.11% of assets per year, compared to 0.09% for the popular SPY ETF that tracks the S&P 500 in the US. Rate S&P 500 funds with fees as low as 0.03%.
After three decades of poor growth, Japan’s economy may seem like a lost cause. That blunts the ability to be amazed at events like the central bank devouring the stock market. But policy makers elsewhere still think that Japan is a role model for some reason, and many central banks have followed the BOJ’s lead on quantitative easing, negative interest rates, and the like.
The Fed has dipped into the ETF market, with small purchases of corporate bond funds over the summer. If Congress doesn’t put restrictions on what the Fed can buy, expect more in the next panic, if not sooner.
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