Business / Financial Markets

Bank of Japan's ETF buying leaves Nikkei 225 trailing Topix, analysts say

Bloomberg

The Bank of Japan’s reduction of the amount it invests in the Nikkei 225 stock average is leaving the blue-chip gauge lagging behind the broader Topix by the widest margin in nearly two years.

Following criticism that its exchange-traded funds purchases are distorting the stock market, the central bank said last September it would reduce its Nikkei 225 buying in favor of the Topix, which covers all stocks in the Tokyo Stock Exchange’s first section.

While a 26 percent slide this year by Uniqlo clothing stores operator Fast Retailing Co. — which has the heaviest weighting in the price-weighted smaller gauge — has contributed to its underperformance, falling out of favor with the BOJ is having more of an impact, according to analysts.

“At the moment, there are no enthusiastic buyers of the Japanese stock market beyond the Bank of Japan,” said Yutaka Miura, a senior technical analyst at Mizuho Securities Co. “In terms of the trading flow, the Topix is getting far more purchases compared to the Nikkei 225.”

The BOJ bought a total of ¥4 trillion of ETFs so far this year through Friday. Its Topix-linked ETF buying is likely to have reached around 73 percent of its total purchases in July, and is unlikely to have changed much in August, according to Nicholas Smith, a strategist at CLSA Ltd. in Tokyo. Foreigners sold Japanese shares for three weeks in a row through the week ended Aug. 11. The NT Ratio, or the Nikkei 225’s closing level divided by that of the Topix, fell Monday to its lowest level since Oct. 26, 2015.

With Fast Retailing accounting for 6 percent of the Nikkei 225’s weighting, its worst year since 2010 amid a struggle to revive domestic sales and profit growth has helped crimp the Nikkei 225’s 2017 advance to just 1.5 percent versus 5 percent for the Topix. The narrower measure also faces criticism for being swung too easily by the movements of a handful of heavyweight stocks, including Fast Retailing.

The “Nikkei is completely dysfunctional,” and “damages market efficiency,” with its negligible exposure to banks or automakers, the two biggest industries, Smith said. “Really, the Tokyo Stock Exchange ought to phase out Nikkei futures, but they can’t bring themselves to do it.”

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