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Japan ETFs Could Experience Greater Volatility as BOJ Steps Back

This article was originally published on ETFTrends.com.

The Bank of Japan has been propping up the Japanese equity market as part of its aggressive quantitative easing program, but the central bank has quietly pulled back support, potentially fueling greater volatility in the country-related exchange traded funds.

Over the past three months, the iShares MSCI Japan ETF (EWJ) fell4.7%, Xtrackers Japan JPX-Nikkei 400 Equity ETF (JPN) decreased 5.4% and iShares JPX-Nikkei 400 ETF (JPXN) declined 5.4%.

The BOJ has been buying alternative index-based funds. The central bank has acquired Japan-listed ETFs that track the JPX-Nikkei 400 Index, which also serves as the underlying benchmark for JPN and JPXN.

According to one brokerage calculation, the BOJ has become a top-10 shareholder in 70% of shares in the Tokyo Stock Exchange first section, the Financial Times reports.

BOJ Speculation

However, there is growing speculation that the central bank is cutting back on its approach based on the fact that in the three-and-a-half weeks since the BOJ tweaked its target range for yields on 10-year Japanese government bonds, it has not bought ETFs in a number of sessions when the markets pulled back. In previous periods, the BOJ would always support its domestic equity market during the dips.

A brokerage argued that the correlation between the performance of the Nikkei share index in the morning session and ETF buying in the afternoon had now "broken down" in what some call a stealth tapering.

Mizuho Securities also pointed out that a sell-off of the Topix small-cap index, which hit a year-to-date low this week, suggested that the BOJ was taking a more hands off approach - small-caps have been a large beneficiary of ETF buying from the central bank and are seen as a natural target in case the BOJ cuts back.

“It could be fair to say that the BoJ has started to quietly reduce its ETF purchases,” Nomura chief equity strategist Hisao Matsuura told the Financial Times, “although it is unlikely to say so”.

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