Tokyo trading floors are predicting a treacherous session on Friday as the Bank of Japan begins to roll back the most glaring distortions of its ¥6tn exchange traded fund (ETF) buying campaign.
With the market closed for Thursday’s national holiday, Friday’s will be the first full session since the BoJ formally announced that its ETF buying programme would now favour funds tracking the market-capitalisation ranked Topix index over the more opaque, price-weighted Nikkei 225 Average.
As well as potentially sharp sell-offs of stocks with heavy weightings in the Nikkei 225 Average, brokers are expecting strong participation by high-frequency traders and retail speculators as they attempt to second guess the precise moment that the central banks’ trades are put through.
The move, which was broadly welcomed by investors on a day that left many uncertainties over the BoJ’s next move, was the latest significant change to a controversial ETF buying programme whose annual rate the BoJ raised from ¥3.3tn to ¥6tn at its meeting in July.
Yujiro Goto, a market strategist at Nomura Securities, said the BoJ’s amended programme, which would see it making ¥2.7tn purchases of Topix-linked ETFs “can be viewed as positive for the equity market, as the sustainability of ETF purchase operations will be strengthened”.
Earlier in the summer, say brokers, about 55 per cent of the BoJ’s ETF purchases were focused on funds that track the Nikkei 225 — an index that accords four stocks a combined 20 per cent weighting and is described by Zuhair Khan, an analyst at Jefferies in Tokyo, as a “particularly bad” choice for a central bank to favour.
According to Mr Khan’s calculations, the BoJ’s heavily skewed purchases of Nikkei-tracking ETFs mean it may already own 48 per cent of the free floating shares of Fast Retailing, 24 per cent of Advantest and hold about 10 per cent of the free float of around 30 Japanese companies.
The BoJ’s purchases have also caused the available free float of certain companies to dry up, risking even greater distortions in the stock prices of companies such as NTT Data, Kikkoman, Hokuetsu Kishu Paper and Matsui Securities.
Markets seem a bit confused . . . and rightly so. The Bank has effectively told markets that it has a Royal Flush and the markets are questioning [BoJ governor Haruhiko] Kuroda’s poker face
– James Athey at Aberdeen Asset Management
By contrast, the BoJ’s concentration on the Nikkei has left it underweight the banking and automotive sectors — the backbone of corporate Japan and the industries that include Toyota, Mitsubishi UFJ Financial Group and the country’s biggest companies by market capitalisation.
The distortion became so pronounced that the NT Ratio Index — a gauge of how closely the Nikkei and Topix track one another — blew out to a 17-year high. When the BoJ began informally reversing its Nikkei focus in September, the ratio began to fall sharply.
On Wednesday afternoon, trading reflected a renewed scramble by investors to position themselves for the BoJ to increase its focus on the Topix. With buying focused on market capitalisation, the Nikkei closed the day 1.9 per cent higher while the Topix surged 2.7 per cent.
The relative clarity of the BoJ’s position on ETFs, though, was not matched by its other announcements on Wednesday.
“Markets seem a bit confused . . . and rightly so,” said James Athey at Aberdeen Asset Management. “The Bank has effectively told markets that it has a Royal Flush and the markets are questioning [BoJ governor Haruhiko] Kuroda’s poker face.”