Ever since 2013, the Bank of Japan has been holding up Japanese stocks like Atlas carrying the weight of the world.
Following years of languishing economic growth, Abenomics was meant to pump some new life into the Japanese economy via a number of policy levers, not the least of which was a government-backed stock-buying program like no other. In a nutshell, the central bank is authorized to buy around three trillion yen or US$25 billion a year in Japanese equities via ETFs. It’s proven to be a major boost for ETFs, which have in the past drawn scrutiny from regulators and policymakers for their potential impact on capital markets.
In the case of Japan, ETFs became a key government policy plank rather than a threat to market stability.
Japan equity ETFs have fared pretty well as a result, particularly as other markets have floundered. According to the latest BlackRock landscape report from August, they posted strong results as Chinese stocks tanked. Even though Japan’s growth numbers were looking weak, investors poured money into Japanese equities in anticipation of more government stimulus. All told, Japan ETF exposures have experienced record inflows this year—in all, US$40.4 billion this year, surpassing a 2013 record of US$38.1 billion.
But what’s become known as the “Abenomics trade” is falling out of favour particularly in the wake of Standard & Poor’s downgrade of Japan’s debt. Here’s what the rating agency said: Despite showing initial promise, we believe that the government’s economic revival strategy—dubbed ‘Abenomics’—will not be able to reverse this deterioration in the next two to three years. As the Financial Times reports, some managers agree with S&P’s conclusion.
So where does the relationship between the Bank of Japan and ETFs go from here? Bloomberg reports that, on Sept. 8, the Bank of Japan didn’t step in to address a stock market slump as investors expected. Why not? Because the central bank could be reaching its buying limit for the year. It’s already shelled out 78% of the total three trillion yen earmarked for stock buying this year. So it’s either going to have to slow down for the rest of the year or boost its allotment.
The Bank of Japan could make that decision at the end of the month—ETF watchers would do well to keep an eye on that decision. It could spell the end of one of the big trades of the last few years if the central bank decides to hold tight and not raise the allotment. Or it could show that Japan still has faith in its ETF buying program if it decides to stay the course.
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