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Economy

Global investors ditch Japan stocks but BOJ swoops in

BlackRock, State Street and peers cut investment stance on equities

The BOJ bought roughly 5.6 trillion yen worth of ETFs in fiscal 2018.

TOKYO -- Overseas investors sold off Japanese stocks by the largest margin in 31 years in the fiscal year ended Sunday, yet the Bank of Japan's asset purchases absorbed all the bleeding, exposing the central bank's outsize role in the market.

Market participants abroad unloaded about 5.63 trillion yen ($50 billion) worth of shares on a net basis, the Tokyo Stock Exchange reported Thursday, for a second straight year of net selling and the highest sell-off since 1987.

But this sell-off was matched by the BOJ's efforts to pump money into the economy through asset purchases, as the central bank bought roughly 5.65 trillion yen worth of equity.

International investors unloaded Japanese shares as they became alarmed by the prospect of a global slowdown. With many Japanese manufacturers reliant on exports, overseas analysts cut their recommendations for those stocks amid China's decelerating economy and Beijing's trade war with the U.S.

BlackRock, the world's largest asset manager, downgraded its investment stance on Japanese equities to "neutral" from "overweight" in July, the first revision in about 20 months.

State Street Global Advisors, a U.S.-based asset manager ranking third globally, shrank its portfolio allocation in equities during the latter half of 2018, citing the protracted Sino-U.S. trade war and how that would affect risk assets. The investment house also downgraded its recommendation for Japanese equities from neutral this year, citing the risk of yen appreciation.

In light of such a bearish view among foreign investors, the BOJ has stepped up its purchases of Japanese stocks through exchange-traded funds. The program began in 2010 when the Nikkei Stock Average wallowed below 10,000 points. The central bank's objective then was to lower the risk premium, and the purchasing volume stood at 450 billion yen.

But in 2016, the BOJ raised its annual ETF purchasing goal to 6 trillion yen. The central bank's estimated aggregate ETF balance totaled 29 trillion yen as of Wednesday, equivalent to nearly 5% of the market capitalization on the TSE's first section.

The central bank aims to use ETF purchases to stoke inflation by spurring gains in asset values, as well as promoting active private consumption.

But having a central bank directly prop up stock prices carries inherent risks. If the Nikkei average sinks below 18,000, the market value of the ETFs held by the bank will fall below book value, BOJ Deputy Gov. Masayoshi Amamiya warned in March. Though the index remains well above that threshold, a sudden downturn would damage the BOJ's net worth and potentially shake confidence in Japan's currency.

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