It was almost two years ago that the Bank of Japan decided to increase its purchases of exchange-traded funds as part of its “new paradigm” in monetary policy.  Although there is little information to go by, the central bank appears to have ended up as a major, though invisible, shareholder of Fast Retailing and other pieces of corporate Japan.

It is generally believed that since 2013 the BOJ was basing its ETF purchases on the so-called 1% rule: Whenever the Topix Index were to fall more than 1% during the morning session, the bank would step in to buy ETFs during the afternoon session.  Recently, though, the BOJ’s buying behaviour changed, according to Kazuhito Suzuki, a senior strategist at Shinkin Asset Management. 

In January, the BOJ purchased ETFs on 10 days, almost every other trading day, spending 344.3 billion yen ($2.8 billion) during the month.  Both the number of days and yen amount were record highs since the BOJ began aggressively flooding Japan’s financial system with yen in April 2013. 

That is a lot of ETFs.  Consider that trust banks in the same month spent a net 520 billion yen on stocks. 

It seems that the BOJ in January stepped in to buy ETFs whenever the Topix fell, no matter how slightly.  This ultra-aggressive posture is part of the central bank’s additional easing efforts, announced in October.  That month, the bank said it would increase its outstanding ETF holdings by about 3 trillion yen during 2015 (it projected it would own 3.8 trillion yen worth of ETFs at the end of 2014).

The BOJ purchases ETFs linked to the Nikkei Index, the Topix Index and JPX-Nikkei Index 400 but “does not disclose the amount or type of ETFs purchased, including at news conferences,” a BOJ media relations representative said.

David Fuller's view

Here is the Nikkei Asian Review article.

There may be no such thing as a free lunch in the stock market, but Japan is doing its best to change that truism.  Why, you might ask? 

Well, Japan’s heady growth years were in the 1980s, when it produced the biggest stock market bubble of all time.  Rich Japanese businessmen were purchasing trophy properties from Australia’s Gold Coast to New York’s Times Square, and they paid in cash.  I happened to be visiting Asia with TCS in those years.  One of the more amusing and also frustrating experiences that I recall was the pecking order in Hong Kong’s shopping centres for tourists.  A reasonably well dressed westerner would usually receive attentive service, at least until some Japanese customers entered the shop.  At that point the sales staff moved on without a word, because the big spenders had arrived. 

Shinzo Abe and his ministers are trying to recreate Japan’s prosperity, which they know was created by hard work, monetary accommodation and self-belief.  That confidence was shattered when Japan finally burst its bubble with excessively tight monetary policy commencing in 1990.  Japan has yet to recover. 

Can Japan now buy an economic recovery?  Possibly, and it can certainly buy a stock market recovery.  This looks like a classic case of ‘don’t fight the BoJ’.  This five-year weekly chart of the Nikkei 225 shows the explosive start to Japan’s monetary reflation with the sustained break above 9000 commencing in November 2012.  That initial bull market stalled near 16000, until the BoJ became considerably more aggressive last October.  Those gains are being consolidated and a sustained move above 18000 will signal a resumption of the overall upward trend.