In the movie, Brewster's Millions, the hero can only collect his inheritance if he successfully spends a huge sum of money by a fixed date with nothing to show for it at the end. Has the Bank of Japan, some now wonder, talked itself into the same comedy script with exchange traded funds? In late July, 2016, the Bank of Japan doubled its annual target for ETF purchases to 6 trillion yen. It never specified when the year in question began, but the general assumption is that it is running on a calendar basis.
The issue, as brokers have spotted, is that Japanese stocks have had a fabulous run of late. On Monday, intraday trading on the Nikkei 225 took the index to within about 40 points of its post-bubble high. Because the BoJ's ETF almost immutable trading strategy is to buy in the afternoon if the market is down in the morning, it has been starved of those opportunities in recent months. The monthly purchasing totals have plunged since August. And in October, when the Nikkei was piling 1,600 points on to its score, the BoJ barely bought at all. This theoretically leaves it with a Brewster's Million pre-Christmas challenge of buying $1.6 trillion yen EFTs over the remaining 40-odd trading sessions of 2017.
This comes, however, as there is a solidifying optimism on Japan. The yen is expected to remain comfortably soft against the dollar. The share buyback cycle is looking healthy again. And corporates, especially those with exposure to global technology, have been knocking the lights out on earnings. The problem seemingly faced by the Bank of Japan is whether it can get away with missing the target by a significant margin. Would doing so by, say, a trillion yen add a destabilising quantity of fuel to the view that it is already quietly tapering?
The alternative of tweaking the buying strategy and steadily accumulating ETFs between now and the end of December, even if the market rises, is clearly fraught. The Bank of Japan already faces scepticism over the necessity of the ETF programme as a whole for the fact that it has become the largest shareholder of many companies and for the amount of risk it has taken on relative to the BoJ's net assets. The answer most now suspect is that the BoJ will not feel obliged to follow the Brewster script if the market remains around these 21 year highs. As Nomura analyst, Hisal Mataura puts it, while it is easy to say that the BoJ is distorting the market, we're not alone in being unable to put a finger on what exactly that means.