Some investors are worried about the market impact when the Bank of Japan decides to wind back an extraordinary yearslong program of support for the country’s stock market, but the world’s largest money manager sees less reason for concern.
There will probably be some initial volatility for equities when the BOJ announces a slowdown in purchases of exchange-traded funds, according to Jason Miller, the head of BlackRock Inc.’s iShares business in Tokyo. But the move may then be interpreted as a sign of confidence in the economy and market, he said.
The central bank has been aiming to spend about ¥6 trillion ($54 billion) a year on ETFs since it doubled its purchase target in 2016 as it stepped up a massive stimulus program. Some have speculated that BOJ Gov. Haruhiko Kuroda and his team are tacitly moving away from the program, as monthly purchases of ETFs tumbled in July and August. The bank has denied it.
When it does come, a decision to taper “could give the market a sense that it’s strong enough to stand on its own feet,” Miller said in an interview. He declined to give a forecast for when that might happen.
The central bank made several tweaks to its ETF program at its policy board meeting in July, including saying the volume of buying would depend on market conditions. Kuroda has said that the purchases will be more sustainable after the adjustments.
The BOJ owned an estimated 75 percent of the ETF market as of the end of July, up from 62 percent two years ago, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg.
Miller reiterated his view that the purchases have had their intended effect of lowering equity risk premiums, or the theoretical extra return investors demand from a stock compared with the so-called risk-free rate offered by government bonds. His opinion stands in contrast to a barrage of criticism from others that the buying distorts the market.
Concerns surrounding how the ETF program could be influencing prices and hurting liquidity for certain individual stocks is overdone, Miller said. He praised the bank’s July decision to increase the proportion of ETF purchases tracking the Topix index, further reducing the weighting of the narrower 225-issue Nikkei average.
When the Bank of Japan starts tapering, it will probably have little effect because the market will be “on a solid uptrend,” said Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management Co. in Tokyo.
But Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management Co., says it’s still too early for that discussion, because the economy “isn’t quite in that state yet.”
And Miller, for his part, acknowledges that his view of a good outcome — or at least a less-debated positive effect after some initial turmoil — is still in the minority.
“I never hear that in the marketplace,” Miller said. “But I do think” the economic and market strength that tapering would imply is a “silver lining.”