Bank of Japan’s 75% ownership of ETFs and rising


False Positive?

We’ve all heard about as much as we can take about the U.S. Fed’s multi-part QE program, and similar stimulus programs instituted by the European Central Bank.  What they mostly have in common is the purchase of government and certain mortgage-backed bonds on the world markets, which has the effect of holding down bond rates and, therefore, borrowing rates.

But surely the strangest form of government intervention is taking place in Japan, where the Bank of Japan has embarked on an aggressive program of buying, not just  Japanese government bonds, but also stocks.  Having a buyer the size of Godzilla stomping into the equities market is bound to add to the demand side of the market, which will tend to raise stock prices—and, indeed, the Japanese Topix Index—the broadest measure of Japanese stocks—has risen from 1500 in May to 1813 recently.  The year-to-date return is a robust 19.78%.

But the question is: how long can the Bank of Japan keep adding to its stock portfolio?  A recent report shows that the Bank of Japan now owns 75% of the shares of Japanese ETFs (see chart), and some predict that it will own 80% by year-end.

The Bank of Japan’s aggressive buying up of Japanese government bonds has led to one of the more interesting anomalies in the global financial scene: bonds are now routinely issued at negative interest rates, meaning the Bank of Japan and other buyers are guaranteed to lose money when they buy the bonds.  In the stock market, the situation may not yet be quite as disruptive, since Japanese ETFs are not as dominant as they are in the U.S.; the Bank of Japan holdings currently amount to just over 5% of Japan’s Topix index stock market capitalization.  But nobody knows what will happen when (and it is not “if” but “when”) the central bank has to start selling off its positions.  The bull market that Japanese investors have enjoyed this year may not be sustainable on the metric merits, and could turn around fast if Godzilla decides to stomp in the opposite direction.


Contributed by Bob Veres

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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