As Japan's Nikkei Stock Average (Nikkei 225 index) keeps hitting record highs, the Bank of Japan (BOJ) has decided for the first time to sell its holdings of exchange-traded funds (ETFs) and real estate investment trusts (REITs). While the consensus is that the short-term impact will be limited, calculations for retail investors in Japan are expected to get more complicated.
According to the financial investment industry on the 23rd, the Bank of Japan announced on the 19th after a monetary policy meeting that it would sell the ETFs and REITs it holds. It comes 15 years after the Bank of Japan, unusually for a Central Bank, began buying ETFs in 2010.
As of the end of March this year, the ETFs held by the Bank of Japan totaled 70 trillion yen (about 662 trillion won), equivalent to 8% of the Tokyo Stock Exchange's market capitalization. To minimize market shock, the Bank of Japan capped annual disposals at 620 billion yen (about 5.8 trillion won) and will adjust the daily sale share to about 0.05% of total trading volume, so it is not expected to cause short-term disruption.
Bank of Japan Governor Ueda Kazuo said, "By simple calculation, it would take more than 100 years (to sell)," adding, "It is appropriate to proceed little by little to avoid market turmoil."
During the process in which the Bank of Japan disposed of shares it had purchased from banks over 10 years, the Nikkei 225 index also traced an upward-sloping curve.
However, there is also an assessment that REITs, unlike ETFs, could carry relatively more burden. While the ETFs currently held by the Bank of Japan have room, with returns exceeding 100% over book value, the gap between the book value (650 billion yen) and market value (700 billion yen) of REITs is not large. That means REITs could swing more on the Bank of Japan's selling volume.
A securities firm researcher said, "Since a Central Bank must adhere to the principle of avoiding losses during the selling process, selling REITs, which are smaller in size but have lower returns, could be more challenging," adding, "If losses occur, the Central Bank would effectively be absorbing the loss and thus supporting REIT managers."
Retail investors in Japan had their losses from a volatile yen exchange rate offset by the stock index's rally, but they now face a new variable to assess. The won-yen exchange rate surged from 934.67 won at the start of the year to 1,012.07 won on 4th, then has been moving sideways around 940 won. There are also projections that moves could grow larger depending on the outcome of the Liberal Democratic Party leadership election.
The fact that opinions were split, with seven in favor and two against, even as the Bank of Japan decided to keep the benchmark rate on hold at this monetary policy meeting, is another factor that could heighten uncertainty. Moon Nam-jung, a researcher at DAISHIN SECURITIES, said, "The Japanese stock market's five straight rate holds by the Bank of Japan have been one pillar of the rally," adding, "If, on top of that, it sells ETFs and REITs, even if it takes a long time, it is highly likely to cause short-term discomfort in investor sentiment."
The fervor for investing in Japan may cool further. According to the Korea Securities Depository (KSD), domestic investors had recorded net sell settlement of more than $700 million (about 980 billion won) in Japanese stocks this year through 19th. Assets under management in Japan equity funds are also down 82.2 billion won from the start of the year.