The Bank of Japan has radically shifted how it will purchase exchange-traded funds (ETFs) in Japan's stock market. Here's how to play it.
As part of its quantitative and qualitative easing (QQE) program, the BOJ has been purchasing ETFs at an annual rate of around 5.7 trillion yen ($56.12 billion), spread among three indexes: the Topix, the Nikkei 225 and the JPX Nikkei 400 in amounts roughly proportionate to the ETFs' market value.
That spurred complaints the market was being distorted as the purchases were skewed toward the Nikkei index, which is weighted by the price of individual stocks, compared with other indexes, such as the broader Topix, which are weighted by market capitalization.
In a likely move to address those concerns, the BOJ said after its policy-setting meeting on Wednesday that now 3 trillion yen of its purchases would still be divided among ETFs based on the three indexes, roughly proportionate to the ETF's total market value.
But the central bank added that the remaining 2.7 trillion yen would be aimed only at funds tracking the Topix index. It said the 300 billion yen allocated to ETFs tied to "supporting firms proactively investing in physical and human capital" would be unchanged.
In a note on Wednesday, analysts at Nomura estimated the change meant around 70 percent of funds would be allocated to the Topix index, 28 percent to the Nikkei and 2 percent to the JPX Nikkei 400, compared with an estimated 42 percent, 53 percent and 4 percent respectively, previously.
That was a likely driver of the Topix index's outperformance on Wednesday, when it closed up around 2.7 percent, compared with the Nikkei's 1.9 percent gain. Japan's markets were closed Thursday for the autumnal equinox holiday.
Nomura expected the biggest gainers from the change would likely be among the low-liquidity small-capitalization stocks included in the Topix.