The Bank of Japan has had a lot less impact on the Japanese stock market than some have assumed in recent years, and the effectiveness of its purchases in reflating the economy may be limited, according to analysis by Societe Generale.
While the BOJ held about three-quarters of the assets of Japanese exchange-traded funds as of earlier this year, that still amounted to just 3 percent of the stock market’s capitalization, according to Societe Generale estimates. In secondary trading, they assessed that pricing showed the purchases weren’t making the market less liquid.
“The conclusion we are making is that the liquidity of the market is not really impacted,” said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, who was part of a team that analyzed the ETF purchases in an April report. “I don’t think there has been any real distortion in market prices,” he also said.
ETF purchases were designed to complement the BOJ’s broader monetary stimulus, by shrinking the “equity risk premium,” or the theoretical extra return investors demand from a stock compared with the so-called risk-free rate offered by government bonds. A smaller premium would make it less costly to issue stock, giving companies greater firepower for investment spending. Yet Societe Generale’s analysis indicates there’s no evidence the BOJ’s actions have brought down the premium.
The central bank’s ETF plans and speculation about them have had a noticeable influence on intraday trading, according to market participants, even if they might not have affected valuations. The conclusion suggests the BOJ’s impact on stocks is more akin to Japan’s past foreign-exchange intervention — where officials would move the market for short time periods, though have no lasting effect.
“The BOJ needed to take non-conventional monetary policy,” given the reflation imperative, according to Benzimra. “It was a good idea to try a number of things.”
The equity risk premium — also known as the cost of equity — has come down by more than 1 percentage point, to about 3.6 percent, since BOJ Gov. Haruhiko Kuroda unleashed his broad monetary program in April 2013, according to Societe Generale. But the bank doesn’t credit the central bank for that.
“The decline in the cost of equity is a good thing for the Japanese market, the Japanese economy — but is it coming from the BOJ or is it coming more from the global phenomenon of risk premiums declining everywhere?” Benzimra said in a phone interview Wednesday. “There’s no evidence it’s the ETF purchases that have compressed the equity risk premium.”
In a response to questions, the central bank’s public relations division said that BOJ purchases of ETFs are having the intended effect of lowering risk premiums.
BOJ moves might have helped equities in other ways. Policy makers have expanded the supply of money so much through bond purchases that it’s driven down the yen, stoking corporate profits — and in turn propelling stocks.
BOJ watchers have fretted that the bond buying has been so great — taking up about 40 percent of the market — that it could cause reverberations whenever the central bank exits from its mega stimulus. When it comes to ETFs, there may not be such an exit problem. Societe Generale analysis indicates the holdings could be unloaded in about 5.5 days, based on typical liquidity levels, a “manageable” period, though it’s unlikely there would be any rush to dump the assets.
A more clear-cut problem may lie with a select number of individual stocks in which the BOJ has indirectly amassed significant shares — back when its ETF purchases heavily relied on funds tracking the Nikkei 225 Stock Average, which is now no longer the focus. As of earlier this year, it held an estimated 14.3 percent stake in Advantest and more than 10 percent of six other companies including Fast Retailing, according to Societe Generale. The impact at the single-name level “can vary greatly from one stock to another,” it said in April.
Even so, on an aggregate basis, “liquidity is massive” in Japan’s market, Benzimra said. At most, BOJ purchases may have provided something of a “buffer” for prices, given that they often occur on down days for equities, he said.
He’s not alone in concluding there’s been no real distortion of valuations. Tokyo-listed ETFs are a relatively small part of the stock market compared with other developed nations, according to Jason Miller, head of the ETF business at BlackRock Japan in Tokyo.
Even in markets with greater ETF presence, such as the U.S., academic research has indicated that “it remains the case that investor sentiment, not ETFs, drives market prices,” Miller said.