Bank of Japan to buy $10.5 billion worth of Nikkei and Topix ETFs annually

Apr 4th, 2013 | By | Category: Equities

The Bank of Japan (BoJ) has approved a massive multi-asset purchase programme, including the purchase of billions of dollars worth of exchange-traded funds (ETFs), designed to stimulate the Japanese economy.

Bank of Japan to buy $10.5 billion worth of Nikkei and Topix ETFs annually

The Bank of Japan has vowed to purchase $10.5 billion worth of Nikkei 225 and Topix-linked ETFs annually.

The central bank, which has made beating deflation its number one priority, has vowed to achieve a target of 2% annual consumer price index (CPI) inflation at the “earliest possible time, with a time horizon of about two years”, according to a statement released by the bank.

In order to do so, the BoJ will enter a “new phase” of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) and ETFs in two years.

The programme is the first big move by Shinzo Abe, the country’s recently elected prime minister, and his newly appointed governor, Haruhiko Kuroda, who pledged to “use every means available.”

The BoJ will purchase ETFs so that the amount outstanding will increase at an annual pace of 1 trillion yen – approximately $10.5 billion per year. Although the ETF purchases are dwarfed by the magnitude of JGB purchases (50 trillion yen per year), they are nonetheless noteworthy.

The BoJ already holds about 1.5 trillion yen worth of ETFs ($15.7 billion) and envisages a holding of 2.5 trillion yen ($26.2 billion) by the end of the year, increasing to 3.5 trillion yen ($36.6 billion) by the end of 2014. The idea of these purchases is to lower the equity risk premium, which in turn should boost asset valuations and encourage investment.

The BoJ revealed that the ETFs to be purchased will be linked to the Topix and Nikkei 225 indices, both of which reflect the performance of larger Japanese companies.

The Topix includes all stocks listed on the First Section (the market place for stocks of larger companies) of the Tokyo Stock Exchange (TSE). The index is weighted by free-float-adjusted market capitalisation and currently has approximately 1,700 constituents. The Nikkei 225, which is also based on the First Section of the TSE, is a price-weighted index comprising 225 highly liquid large-cap stocks.

In reaction to the news, the yen immediately slid against the US dollar by about 2.5%, while the Nikkei 225 and Topix jumped 2.2% and 2.7% respectively. Japanese stocks have already rallied strongly this year in anticipation of such an asset purchase programme, and are now up 21.5% for year. Similarly, the JPY/USD has weakened about 6.8% year-to-date. Further equity market strength and yen weakness is expected.

The BoJ did not reveal details of its actual ETF trading strategy, but some commentators have suggested that the bank will buy on signs of stockmarket weakness, perhaps looking to a 1% fall as a trigger for purchases.

With a total market capitalisation of more than $3 trillion for the TSE, the BoJ’s ETF purchases represent a drop in the ocean. However, the marginal difference could be material and provide a backstop to the market. Investors looking to access the BoJ’s target indices could consider the European-listed Lyxor ETF Japan Topix (JPNL) or Credit Suisse Nikkei 225 (CNKY), or the NYSE Arca-listed Maxis Nikkei 225 Index ETF (NKY).

However, bearing in mind the dilutive effect on the yen of this monetary expansion, a more sensible approach would be to consider a currency-hedged Japanese ETF.

Options include the db X-trackers MSCI Japan GBP Hedged TRN Index ETF (XMJG) and iShares MSCI Japan Monthly GBP Hedged ETF (IJPH) for UK, sterling-based investors; the Amundi ETF Topix EUR Hedged Daily (TPXH), RBS Market Access Topix EUR Hedged Index ETF (M9SW), iShares MSCI Japan Monthly EUR Hedged ETF (IJPE) and db X-trackers MSCI Japan EUR Hedged TRN Index ETF (XMK9) for European, euro-based investors; and the  db-X MSCI Japan Currency-Hedged Equity ETF (DBJP) and WisdomTree Japan Hedged Equity ETF (DXJ) for US, dollar-based investors.

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