The Market the Central Bank Bought

The Bank of Japan becomes the country’s largest stockholder.

By The Editorial Board

A Japanese national flag flies at the headquarters of the Bank of Japan in Tokyo.
PHOTO: KIMIMASA MAYAMA/EUROPEAN PRESSPHOTO AGENCY



The Federal Reserve’s Open Market Committee is meeting this week, and we’ll learn Wednesday if it will expand its purchases of Treasurys and private bonds. 

Which makes it a good moment to point out that the Bank of Japan is now that country’s largest single owner of equities. 

This is a milestone worth marking since pressure inevitably will mount on other central banks to follow where Japan’s excessively innovative monetary authorities lead.

BOJ holdings of exchange-traded funds hit around 45 trillion yen ($432 billion) in November, Shingo Ide of the NLI Research Institute calculates. Mr. Ide estimates the BOJ holds some 7% of listed shares by market capitalization. 

The Government Pension Investment Fund (GPIF), which can buy company shares without going through ETFs, also owns about 7% of market capitalization.

That’s a large portion of an economy’s stocks to be owned by any two entities, especially entities controlled by the government. And that figure understates the influence this ownership creates for government in Japan’s ostensibly private economy. 

An analysis by Nikkei in 2016 found one or the other of the government investors directly or via ETF holdings numbered among the 10 largest shareholders for 96% of listed companies. The BOJ owns about 90% of all ETFs in Japan.

No one knows how this is affecting Japan’s market or the economy. You’d expect it to have some effect, and there’s evidence investors sometimes spend more time betting with or against the central bank than poring over corporate financial statements. 

The BOJ has been buying ETFs for a decade, and changes in its investment strategy—such as buying more ETFs that include shares in smaller companies—have swung share prices.

Traders seem to believe the BOJ and GPIF aren’t currently swaying the market in part because Japan’s stock market has not consistently outperformed anyone else’s. 

But it’s hard to say how far the market would have fallen, or how high it might have risen, without this intervention. The GPIF, for instance, does not lend its shares to short sellers.

Concern also is mounting over distortions to the marketplace for ETFs. 

Such funds have proven popular among retail investors in other countries. But the BOJ’s practice of buying from all asset managers has muted competition, especially on the fees managers charge. 

The management fees for the largest ETFs tracking the Topix index clock in at 0.11% of assets per year, compared to 0.09% for the popular SPY ETF tracking the S&P 500 in the U.S. Cheaper alternatives in Japan charge 0.06% but Americans can buy cut-rate S&P 500 funds with fees as low as 0.03%.

After three decades of meager growth, Japan’s economy can look like a lost cause. That dulls one’s capacity to be astonished at developments such as the central bank eating the stock market. 

But policy makers elsewhere still think Japan is a role model for some reason, and many central banks have followed the BOJ’s lead on quantitative easing, negative interest rates and the like.

The Fed has dipped into the ETF marketplace, with small purchases of corporate-bond funds over the summer. 

If Congress doesn’t put restraints on what the Fed can buy, watch for more in the next panic if not sooner.

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