Greater pressure on the Bank of Japan to end its prodigal equity purchases could constrain Japanese equities and country-related exchange traded funds ahead.
Toru Ibayashi, head of Japanese equities at UBS Wealth Management, believes the BOJ will cut its annual buying target for domestic ETFs by as much as a third from the current 6 trillion yen, or $53 billion, Bloomberg reports.
“Four trillion yen,” UBS’s Ibayashi predicted. “And everybody will understand.”
As the economy strengthened since July last year when the central bank doubled its ETF buying spree, more investors are taking in profits in response to Japanese equities hitting their highest in 26 years.
“Fear of deflation was behind the 6 trillion yen target,” Daiwa SB’s Monji told Bloomberg. “We’re no longer in that kind of environment. Risks are now skewed toward the upside, rather than the downside. It’s hard for the central bank to justify its buying spree.”
The BOJ’s ETF buying spree that started in 2010 was part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank has acquired $150 billion in Japanese ETFs as of December 8 and accounted for 74% of the market at the end of October, compared to 65% a year earlier.
Ibayashi now argued that the globally economy has entered a positive cycle that does not require central bankers’s constant hand-holding, so central banks like BOJ can begin to rein in its massive stimulus programs. The UBS analysts also pointed out that companies are increasing capital spending, which may replace stimulus measures.
“Given the circumstances at this point in time, it is difficult for the BOJ to keep buying ETFs at six trillion yen per year,” Ibayashi said.
The increased bet on Japanese equities have helped support Japan-related ETFs, such as the iShares MSCI Japan ETF (NYSEArca: EWJ), Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN) and iShares JPX-Nikkei 400 ETF (NYSEArca: JPXN), but the good times won’t last forever.
The BOJ has been buying alternative index-based funds. For instance, the central bank has acquired Japan-listed ETFs that track the JPX-Nikkei 400 Index, which also serves as the underlying benchmark for JPN and JPXN. The JPX-Nikkei 400 Index was launched in January 2014 as a means of reinvigorating the Japanese equity market. The JPX-Nikkei 400 Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies.
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