The BOJ's Stock Market Distortions Are Coming Under New Scrutiny

The Bank of Japan, sometimes dubbed the Tokyo whale for its huge influence on the country’s stock market, may be about to change its habits because it’s taking up too much of the pool.

That’s the speculation after local press reported that the central bank is considering changing how it buys shares through its exchanged-traded fund program. At its two-day meeting starting Monday, Haruhiko Kuroda’s BOJ will discuss reducing investments in ETFs tracking the Nikkei 225 Stock Average, the old blue-chip gauge, because its purchases are having an outsized impact on its companies, the Nikkei newspaper reported last week. Instead, it will buy more funds tracking the broader Topix index, it said.

If the bank decides to take that step, it’s bad news for the share prices of firms such as Fast Retailing Co., the clothing giant run by Tadashi Yanai, as well as for SoftBank Group Corp. and Fanuc Corp. Those three companies have the heaviest weightings in the Nikkei 225. Fast Retailing’s shares, for example, tumbled 8 percent last week on the news, the worst weekly decline since February, and dragged down the Nikkei 225. Where once the company and the index rode high on the BOJ’s largesse, now they’re already experiencing withdrawal symptoms. The Nikkei 225 fell 0.7 percent at the close on Monday and Topix slipped 0.4 percent.

“I have always been bitterly critical of the BOJ buying of Nikkei ETFs,” Nicholas Smith, a strategist at CLSA Ltd. in Tokyo said in an interview. In the Nikkei 225, ranking is determined by the arbitrary measure of the price of one share, unlike most share indexes, where market capitalization is key. “Buying of it is hugely distortive.”