The Bank of Japan (BoJ) buys ¥6trn of exchange-traded funds in the Japanese stockmarket every year, and is “larger than any other investor bloc “, say Leo Lewis and Lucy Colback in the FT. This has skewed the market in two key ways.
Firstly, the inverse correlation between the yen and equity prices has loosened. A rising yen would tend to depress equities as it lowers the profits of major exporters. But now BoJ buying offsets sales elsewhere when the yen climbs.
The BoJ also buys ETFs in proportion to the size of the indices they track, implying that over half its funds go to the Nikkei 225 index and 40% to the broader Topix index. This reinforces an existing distortion related to how the indices are calculated. Topix weightings are based on market capitalisation and free float, but the Nikkei’s are calculated in proportion to share-price performance. So firms doing well, which become Nikkei heavyweights, get more buying than their size would justify. Indeed, one firm is worth 8% of the Nikkei because it has the second-highest share price in Japan, but it accounts for just 0.3% of the Topix.