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Stocks

BOJ increases its sway over Japan's financial markets

Outsized purchases of JGBs and equities threaten to warp market mechanisms

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The BOJ has become the dominate player in Japan's bond and equities markets.   © Reuters

TOKYO -- The Bank of Japan, already notorious as the biggest holder of Japanese government bonds, has now earned the dubious title of the largest "whale" in the domestic equity market.

As a consequence of the BOJ's ultraloose monetary policy, JGB holdings for the fiscal year ended Friday stood at 423 trillion yen ($3.79 trillion) as of March 20. That marks the first time the metric topped 400 trillion yen, with the amount jumping 20% since the end of fiscal 2015.

Japan's Ministry of Finance issued 123 trillion yen worth of medium- to long-term JGBs over the course of a year, only to see the BOJ drain 111 trillion yen from that pool. The central bank raised its share of outstanding JGBs owned from roughly 30% a year earlier to over 40% today.

That activity has given rise to what is known in the market as "BOJ trading," where one purchases JGBs at finance ministry auctions, then resells the debt to the central bank at a premium. "There are fewer [market] participants who think about where yields will settle based on medium and long-term outlooks for the economic climate," said Izuru Kato at Totan Research.

The BOJ introduced a policy last September focused on keeping the lid on interest rates. The yield for 10-year JGBs, the benchmark for long-term rates, is mostly hovering below 0.1%. That is the ideal level for the BOJ and its aim to boost inflation to the stable 2% rate. But it is also true that these dynamics are weakening market mechanisms.

Majority shareholder

The central bank is also looming ever larger in the stock market. The BOJ purchased 5.58 trillion yen in exchange-traded funds in fiscal 2016, an 86% leap from the previous fiscal year. The total puts the bank above corporations and international investors as the single biggest buyer of Japanese equities.

Last July, the BOJ decided to double the annual purchases of ETFs tracking the Nikkei Stock Average, Topix and other indexes to 6 trillion yen. Each round of ETF purchases by the bank lifts the Nikkei average by about 30 points, according to estimates by Nomura Securities.

That translates to the Nikkei average receiving an aggregate boost of roughly 1,700 points after the current ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016, meaning the BOJ's purchasing program alone accounts for the vast majority of the gain.

The price swings have become smaller now that the BOJ is underpinning the market. The difference between the peak and nadir Nikkei average readings in fiscal 2016 amounts to 4,681, less than the 5,915 points seen in fiscal 2015.

This situation is part of the reason why active traders responsive to price changes have shied away from the market. The trading volume on the Tokyo Stock Exchange's first section dwindled 14% to 543 trillion yen in fiscal 2016.

The BOJ's buying spree could also serve as a crutch for corporations whose earnings are otherwise questionable. "There's a likelihood that the BOJ's purchasing is producing distortions in the price formations for individual companies," said Naoki Iizuka at Citigroup.

(Nikkei)

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