ETF Trends
ETF Trends

The Bank of Japan is supporting Japanese stocks and country-specific exchange traded funds, helping to cushion falls in the market, with speculators pointing to increased purchases in domestic ETFs on the dip.

Over the past three months, the iShares MSCI Japan ETF (NYSEArca: EWJ) has gained 7.0%. Meanwhile, yen-hedged Japan ETFs, WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP), increased 7.8% and 8.0%, respectively.

The Bank of Japan is purchasing ETFs that track the Nikkei Stock Average and the broader Topix index as part of its massive purchasing program to support the economy, reports Megumi Fujikawa for the Wall Street Journal.

Over the first six business days of August, the central bank acquired ¥92.4 billion, or $904.2 million, in domestic stock ETFs, the longest and largest consecutive buying streak since it started purchasing ETFs in December 2010.

“The record amount of ETF buying seen by the Bank of Japan—combined with a hefty rise in the GPIF’s stock allocation—not only serves to hold up the floor for the equities market, it also goes a long way to keeping public support levels for (Prime Minister Shinzo Abe ) respectable,” Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, said in the article.

Traders have been speculating that the central bank is acquiring ETFs when the Nikkei and Topix dip. Specifically, many believe the BOJ is following a so-called “1% rule” by traders where the central bank acquires ETFs after the Topix index dips 1% in the morning session. The BOJ does not disclose when or why it purchases assets.

The BOJ has stated that it will increase ETF holdings to ¥3.5 trillion by the end of this year, and it held about ¥3.122 trillion as of Aug. 10.

The Nikkei 225 Exchange Traded Fund (1321) is the largest Japan-listed ETF to track the Nikkei 225 index with ¥1.95 trillion in assets under management. The TOPIX Exchange Traded Fund (1306) is the largest Japan-listed ETF to track the TOPIX with ¥1.77 trillion in assets.

Additionally, there are expectations that the Government Pension Investment Fund will also increase its allocations toward domestic stocks. [Japan ETFs Could Strengthen As Institutional Money Pours Into Equities]

However, some observers caution that the central bank can only do so much. Japanese companies have to show that they are standing on solid footing.

“The BOJ can only support the bottom, but stock valuations can only be raised by the values of each company,” Takahiro Sekido, a strategist at the Bank of Tokyo-Mitsubishi UFJ, said in the article.

For more information on Japan, visit our Japan category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.