It’s been years now since Japan first initiated its plan to juice up its economy by buying domestic exchange-traded funds (ETFs). Back in 2010, the Bank of Japan started buying ETFs that track the Nikkei Stock Average and the Topix Index. At a time when ETFs were the target of some serious regulatory side-eye post-Flash Crash, Japan’s innovative use of the products as a pillar of Abenomics caught my eye.
Four years on, however, and investors are showing their skepticism. Japan’s economy is slowing down, and investors are reacting by pulling their money out of Japanese stocks. After a massive 57% gain in 2013, the Nikkei is down 4.5 so far this year.
ETF inflows and outflows show that investors are fine-tuning their approach to Japan, according to Etf.com. The WisdomTree Japan Hedged Equity Fund (a top performer in 2013) has had outflows of about US$2.3 billion, while the iShares MSCI Japan ETF had inflows of $1.1 billion as investors seek to benefit from a possible rise in the yen.
The Bank of Japan is doing some fine-tuning as well, upping its purchases of ETFs in response to the economic bad news. The central bank purchased ¥92.4 billion in ETFs over the first six business days of August—the longest and largest consecutive buying streak since it started purchasing ETFs in December 2010, reports .
Some say the Bank of Japan is following “the 1% rule” of traders that have it buying the index after it falls 1% in the morning session.
Japanese ETFs could get an additional boost if the Government Pension Investment Fund follows suit and boosts its investment in domestic stocks in line with the central bank.
All that is holding up the floor of the Japanese equity market—but what’s it doing to boost the greater Japanese economy? Skeptics say not much. Analysts quoted by The Wall Street Journal say that the Bank of Japan is merely holding up the bottom and that unless the values of companies in the index rise, the stock valuations will remain the same. Unless investors see improvements in business conditions, there won’t be any more sharp rises in domestic shares, notes Takahiro Sekido, a strategist at the Bank of Tokyo-Mitsubishi UFJ.
The next year will tell whether or not the experiment of Abenomics really works—the Bank of Japan has plans to boost its ETF holdings to ¥3.5 trillion by the end of this year, up from the ¥3.122 trillion it held on Aug. 10.
So there are still a few more months to see if all this is working….Stay tuned.