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BOJ's ETF move to focus on firms with high capital investment, wage payouts

Central bank strategy seen as moving away from monetary into fiscal policy territory

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Tokyo stocks may have taken a tumble in the wake of the latest China rout, but if the Bank of Japan (BOJ)'s gamble of buying large amounts of Japanese exchange-traded funds (ETFs) pays off, the Tokyo market could see a major uptrend in share prices this year, say market experts.

Tokyo

TOKYO stocks may have taken a tumble in the wake of the latest China rout, but if the Bank of Japan (BOJ)'s gamble of buying large amounts of Japanese exchange-traded funds (ETFs) pays off, the Tokyo market could see a major uptrend in share prices this year, say market experts.

The aspect of the central bank's ETF strategy that has caught the attention of the market is the focus on buying funds whose component companies have high rates of capital investment and wage payouts, as a means of bolstering economic growth in Japan.

But the BOJ plan also has wider implications for financial-market and investment-product development in the world's third-largest economy, analysts told The Business Times.

William Thompson, chairman of Private Capital in Hong Kong and a director of Finavestment in London, described the move as being "well ahead of what other G7 (Group of Seven) nations' central banks are doing".

Mr Thompson, a former senior US Treasury official, added: "The BOJ's plan to invest further in capital markets through investments in ETFs seems to take the central bank away from its supposed focus on monetary policy into the area of fiscal policy and macroeconomics."

Veteran Japan analyst Jesper Koll, chief executive officer of investment firm Wisdom Tree Japan, said the ETF strategy announced last month by the BOJ Policy Board has great potential significance for the Tokyo stock prices in the longer term.

"The key aspect is that the BOJ is actually trying to spark more financial-product development in Japan by de facto offering to seed-fund new ETFs," said Mr Koll, a former chief equity strategist at JP Morgan Chase Bank in Tokyo.

The Japanese authorities, including the BOJ, have been engaging in "price-keeping operations" in past years by making short-term, market-supporting purchases of shares in times of financial emergency and then selling the stock later.

But with this switch in focus to ETF purchases, the BOJ breaks new ground, especially as the strategy is also aimed at bolstering Japan's macro economy, analysts say.

The Japanese central bank already owns some 54 billion yen (S$645.9 million) in ETFs, or nearly half the market.

BOJ governor Haruhiko Kuroda had announced last month that the bank would buy 300 billion yen a year in ETFs, in addition to the three trillion yen it already assigns each year to ETFs.

Mr Koll remarked that Japan's ETF market is seriously undeveloped: barely 100 ETFs exist there, and are found in only three indexes - the Nikkei 225, the Topix and the JPX400. (In the US, there are more than 4,000 ETFs based on various methodologies.) "What this means is that Japan has hardly participated at all in the biggest innovation and growth part of finance seen over the past five years. Globally, (the value of) ETFs went from less than US$1 billion to US$3 trillion in the last 10 years, saving investors billions of dollars in commission."

Since the BOJ said it would focus on ETFs whose component companies are boosting capital investment and wage payouts - objectives in line with Japanese Prime Minister Shinzo Abe's priorities - asset managers in Japan have begun conceptualising investment funds with this in mind.

Kohei Sasaki, manager of ETF promotion at Mitsubishi UFJ Kokusai Asset Management in Tokyo, told Reuters that his firm is already considering coming up with such a product, and has contacted index vendors on the matter.

Mr Koll said: "If you do not invest in productive capital, your company will not grow; there is no question that Japan Inc has under-invested."

He told BT, however, that the real question is whether the capital is used in productive investments with a high return, which has often not been the case in Japan.