Japanese institutional investment in exchange-traded funds (ETF) is expected to drive the market even though the central bank has begun to slow its buying, according to Tsuyoshi Oda, general manager for new listings at the Tokyo Stock Exchange.
The Bank of Japan started purchasing ETFs in October 2010 as part of efforts to boost the economy and maintain its 2% inflation target. It’s now the country’s largest ETF buyer.
Last year, the central bank bought around 9 trillion yen (US$85.5 billion) worth of ETFs, more than doubling from 4.4 trillion yen in 2019, and representing almost 90% of inflows into the ETF market.
However, the BOJ overhauled its asset purchase policy in December and opted to adopt a more flexible approach in ETF allocation amid market volatility triggered by the coronavirus pandemic. The central bank’s ETF purchases fell to a five-year low of 50.1 billion yen in January.
But according to Oda, Japan’s ETF market capacity will continue to grow strongly regardless of the asset-buying schemes of the BOJ and the Government Pension Investment Fund (GPIF), the world’s largest pension fund and the second largest ETF buyer in the country.
“The BOJ’s ETF purchasing has been regarded as lowering risk premia in the stock market, so we pay close attention to the BOJ purchasing policy,” Oda says in an interview with Asia Asset Management. “However, the TSE’s ETFs are expanding even if the BOJ and GPIF amounts held are excluded. ETFs are now utilised by most of the major domestic financial institutions as an investment method.”
Retail asset allocation demand for ETFs has also increased in the wake of the pandemic. Oda says many recipients of government financial support are investing the money and ETFs are one of their top choices. “By contrast, many institutional investors say there have been no effect on their investments,” he adds.
Japan’s total ETF assets grew more than 22% year-on-year to 54.8 trillion yen in 2020.