TOKYO -- If the Nikkei Stock Average extends its winning streak to five years in 2016, it will owe much to the Bank of Japan and the Government Pension Investment Fund. These two institutions constitute one of the top 10% shareholders in an astounding 96% of major listed companies.
That is 1,917 out of the 2,000 companies on Tokyo Stock Exchange's first section, according to estimates based on the BOJ's roughly 10.7 trillion yen ($90.9 billion) in exchange-traded fund holdings, and the GPIF's disclosed equity positions.
In this way, public money represents the biggest stake in 484 companies -- nearly one in every four. Compare that to Nippon Life Insurance, a leading private-sector investor, which is top shareholder in only 1% of first section companies.
Public money owns 18.1% of chip testing equipment maker Advantest, 17.8% of TDK and 10.8% of Honda Motor, the estimates show. At Fast Retailing, the parent of casualwear chain Uniqlo, the institutions own 14% -- second only to company President Tadashi Yanai's stake.
These stocks are popular among overseas investors and have outsize weights in the Nikkei average. That means that BOJ and GPIF money both supports the market on the way down and accelerates it on the way up, amplifying the effect of foreign buying.
But such influence is not without problems. BOJ money pours into the market via index-tracking ETFs regardless of individual companies' earnings performance or stock valuations -- possibly undermining the market's own ability to pick winners. "If the rally continues, people will again question the point of the BOJ's ETF buying," said Shingo Ide at the NLI Research Institute. What's more, as the amount of outstanding shares available for public trading shrinks, there is a greater risk that even small trades cause wild price swings.
Companies have reacted in different ways to having the BOJ as a de facto major shareholder. The central bank is "different from short-term money, so we don't consider it a problem," said a spokesperson at Advantest. But Comsys Holdings has "mixed feelings" about the situation, "because the stock price goes up or down regardless of our earnings or efforts," an official said. Public money owns an estimated 13.9% of the builder of telecommunications networks.
Ebb and flow
One turning point for the Japanese stock market this year was July 29, when the central bank said it would nearly double its annual ETF purchases to 6 trillion yen from 3.3 trillion yen as part of its monetary easing.
The market has reacted soon to any sign of BOJ buying. The Nikkei Stock Average bounced shortly before the close of trading on Aug. 4 on speculation that the BOJ was making a move, ending the day up 171 points at 16,254 after being down by more than 150 points.
Japan's GPIF is one of the world's largest pension funds, managing some 130 trillion yen in assets. In 2014, the fund increased its target allocation for Japanese equities from 12% to 25%.
These institutions' support has been striking. Having recovered to the 17,000 level on Sept. 5, the Nikkei average has kept climbing, getting an added boost from the yen's weakening since the U.S. presidential election.
The index topped 19,500 at one point Monday, and if it ends 2016 above 19,033, it would mark a fifth straight year of gains -- the longest streak since a 12-year run of positive returns ending in 1989.
The macroeconomic environment has changed from the time when the BOJ began its ETF purchases. The central bank upgraded its assessment of the Japanese economy Tuesday for the first time in 19 months, encouraged by improvement in exports and consumer spending. On slow days the BOJ now buys only around 1.2 billion yen in ETFs, down from more than 70 billion yen per day during peak times.