After nine years of ETF purchases, the Bank of Japan doesn’t have much to show for it
By Mike Bird
Japan’s central bankers have had more success buying bonds than stocks.
Some of the Bank of Japan’s novel strategies for revitalizing a sluggish economy, most notably massive government-bond purchases, blazed a trail for its counterparts in the U.S. and Europe. But its stock-market approach isn’t one central bankers elsewhere should follow too closely.
Speaking to lawmakers in the country’s parliament Tuesday, BOJ Governor Haruhiko Kuroda noted that the central bank now owns more than three-quarters of the country’s exchange-traded funds, the result of a program begun in 2010 and ramped up in 2013.
The main goal was to lower Japan’s equity-risk premium—the extra returns investors expect for buying stock rather than simply parking their money in riskless government debt. A lower premium should raise stock prices and make equity financing easier for listed companies.
But at 6.94%, Japan’s premium remains stubbornly above the U.S.’s 5.96%—with the gap little changed in six years—according to Aswath Damodaran, professor of finance at New York University’s Stern School of Business.
The Sage of Tokyo Photo: Yoshio Tsunoda/Zuma Press
We can’t know what might have happened without the ETF purchases, but their impact certainly isn’t easily visible in Japanese stock valuations. Share prices have actually fallen as a multiple of earnings during the course of the program, while they have risen for U.S. and even European stocks.
Nor does it appear the policy encouraged global investors to buy the country’s increasingly cheap stocks. Instead, they have been persistent sellers.
Worse than ineffective, the policy has been problematic. The BOJ has recently tipped purchases toward the market-weighted Topix index, but many ETFs are benchmarked to the Nikkei 225, which like the Dow Jones Industrial Average isn’t market-weighted. That has left the BOJ with outsize stakes in companies overrepresented in the Nikkei—for example, 20% of Uniqlo owner Fast Retailing Co.at the end of February.
Unlike the bonds that the BOJ owns, which will eventually mature, the equity is the bank’s until it sells. This creates an overhang problem for investors considering a bet on companies like Fast Retailing: Their strategy could be waylaid by a change in central-bank policy.
If benchmark interest rates are still at or near zero when the next financial crisis hits, the question of whether central banks should buy stocks will come to the fore. The Fed should avoid repeating Japan’s mistakes.
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