Business / Financial Markets | ANALYSIS

BOJ's ¥300 billion plan to buy nonexistent ETFs puzzles market

by Yuko Takeo


Bank of Japan Gov. Haruhiko Kuroda has a new plan. He’s going to buy ¥300 billion ($2.5 billion) of something that doesn’t exist.

Markets were roiled Friday after the BOJ unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.”

The central bank will spend ¥300 billion a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions.

The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.

“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.”

The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 stock average and Topix index and owns roughly half of the market for ETFs in Japan.

“High-capex indexes are in their infancy in all markets but it is something we have looked at in the past and have some familiarity with,” said Jason Miller, head of BlackRock Inc.’s ETF unit in Japan, who says his company offers no such ETFs globally. “It is no surprise to see greater demand for this tilt to quality, particularly given the macro backdrop.”

In May, Elkhorn Investments started an ETF in the U.S. that tracks the S&P 500 Capex Efficiency Index, which invests in companies that have boosted sales through capital expenditures. The ETF has attracted $1.2 million in assets.

No products like the ones the BOJ intends to buy are listed on the Tokyo bourse, according to Japan Exchange Group Inc. spokeswoman Miwa Aonuma. She declined to comment on whether there are plans to start such ETFs.

Besides the ETF boost, Kuroda lengthened the average remaining maturity of government bonds bought and increased the maximum amount the bank can own of each Japan Real Estate Investment Trust. The Nikkei 225 whipsawed on Friday as investors digested the central bank announcement, ending down 1.9 percent after jumping as much as 2.7 percent. The index extended declines Monday, losing 1.7 percent at the lunch break.

For Okasan Online Securities Co., the program runs the risk of meddling in the equity market when such ETFs are eventually created, by favoring certain shares over others.

“It’s the same as if the Bank of Japan were buying individual stocks, rather than pushing up the overall market,” said Yoshihiro Ito, chief strategist at the brokerage. “This part also left a bad taste in the market.”