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BOJ's 'wage-hike ETFs' hit wall of investor apathy

Funds designed as policy tool, not investment

TOKYO -- Despite the initial excitement among major financial institutions, the Bank of Japan's push for exchange-traded funds tracking companies that actively raise employee pay or invest in new equipment has run aground.

The idea behind these investment vehicles, dubbed wage-hike ETFs, goes back to December 2015, when the BOJ announced supplementary easing measures including a pledge to spend 300 billion yen ($2.69 billion) a year on ETFs consisting of companies "proactively investing in physical and human capital."

Domestic and foreign financial institutions developed funds based on the central bank's requirements, and six were listed between May and June of 2016. But these ETFs failed to gain traction among investors despite the BOJ's backing and the inclusion of such blue chips as Toyota Motor and telecommunications company KDDI.

The total net assets of wage-hike ETFs now sit at 170 billion yen, having plateaued in December. Trading is minimal, with one such fund from Asset Management One seeing no activity for 22 straight trading days through Tuesday.

"I haven't seen any signs that the BOJ has bought wage-hike ETFs since March," said Seiichi Suzuki of the Tokai Tokyo Research Institute, who watches the central bank's day-to-day activities.

The central bank is believed to have bought roughly 4.5 million yen worth of one such fund from Daiwa Asset Management on March 1. That seems to have been its last such purchase.

Hands tied

The problem is not so much that the BOJ is unwilling to buy these ETFs as that it cannot.

The central bank is bound by its own rule to limit its ETF ownership to no more than the total held by all other investors. The rule, which is said to be aimed at preventing the central bank's buying from distorting stock price discovery and handing risk-free profits to ETF managers, was triggered quickly for many wage-hike ETFs.

The minutes of the BOJ's December 2015 policy meeting show board members expressing hopes of a broader trend toward proactive "investment in physical and human capital" that should encourage a virtuous economic cycle. This suggests that the central bank seeks to provide indirect support for Abenomics' goal of beating deflation by bolstering consumer spending through wage hikes.

Asset management companies have gone along with this scenario. An employee at a Japanese firm that developed a wage-hike ETF within just half a year after the BOJ's announcement noted pressure within the company to get the fund ready to benefit from the central bank's purchases.

Asset managers have their own reasons for supporting this initiative. The BOJ is believed to hold some 15 trillion yen in ETFs -- about 60% of the net assets of funds trading in Japan -- thanks to its aggressive buying program. With management fees on ETFs at around 0.1%, the central bank pays an estimated 15 billion yen a year to the financial industry.

The BOJ is a unique customer, making a steady stream of ETF purchases with no need for so much as a sales pitch. Asset managers hope for similar benefits from the wage-hike ETFs. "If the ETFs' net assets swell from the BOJ's buying, their managers can earn a solid profit," a Japanese mutual fund company said.

Iffy investment

But WisdomTree Japan, the Japanese arm of American ETF developer WisdomTree Investments, has bucked the trend, choosing not to launch a wage-hike fund of its own. CEO Jesper Koll professed bafflement at the theory that the shares of companies that invest actively in people or physical assets will necessarily perform well. The two earliest wage-hike ETFs have underperformed the Nikkei Stock Average.

And data on such points as individual companies' investment in human capital over time or in comparison with other businesses is all but nonexistent. If asset managers thought individuals would flock to these funds just because of the BOJ's stamp of approval, then they thought too little of investors, Koll said.

The BOJ bought 5.58 trillion yen in ETFs in fiscal 2016 and remains the top buyer of Japanese stocks. Its purchases lifted the Nikkei average by an estimated 1,700 points over a year.

As the central bank has become a bigger presence in the market, market players have grown more dependent on it. Wage-hike ETFs arose from the matching agendas of the BOJ, with its tacit support for Abenomics, and the asset management companies that rely on it -- investor needs did not enter into the picture. Global investors may see little appeal in a market that so prioritizes the interests of financial institutions.

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