driven by quantitative easing, the ownership structure of japan’s stock market is undergoing fundamental change. the implications of this development are still uncharted territory.
for decades the term japan inc. has been eponymous with japan’s mighty global conglomerates that run large swathes of the country’s economy. at times, the term has instilled admiration (‘economic miracle’), in the 1980s even fear (‘japan as number 1’), but lately mostly pity (sharp, olympus). who stands behind this term of japan inc., however, is undergoing rapid change.
this shift can best be described as ‘de-privatisation’, coming in two forms: one is the bank of japan’s (boj) buying of stocks via etfs to the tune of now ¥6tn (about $58bn) a year as of july 29 – on top of its already well-known record buying of japanese government bonds; more than half of all available japanese etfs now are in boj hands. this turns the boj into a major shareholder in private companies, such as fast retailing (uniqlo) or advantest, according to the nikkei, a japanese business daily (link). the other is the expanding stock-holding of public investors, such as japan’s government pension investment fund (gpif) – the world’s biggest such fund.
the gpif alone holds roughly 5.5% of japan inc.’s market cap, in addition to the holdings of numerous other (quasi-)public funds, such as post bank. prodded by the government, these public investors are rebalancing their portfolios towards more stockholding, meaning their holdings will expand further. between 2012 and 2015, the gpif alone has doubled its domestic stock holdings to 23.35% of its portfolio.
by july 10, japan’s central bank had amassed ¥8.59tn in etfs (link). this amounts to about 1.5% of japan’s stock market cap (tse first section) and about 2% of the boj’s total assets. now that the boj stepped up its etf buying program to around ¥6tn, this number could balloon to 5% of total market cap in just about two years. seen together with the holdings of public investment funds, it is no wild guess to expect that within two years over 10% of japan’s entire stock market is no longer accessible to private investors.
what are the effects of this de-privatisation? two major concerns stand out: first, the inflow of public money crowds out private investors. if this sounds familiar, it is because the same story beginning to unfold in equity markets has been progressing at a much quicker pace in bond markets. through its program of quantitative easing the boj is buying up government bonds (jgbs) and expanded its holding to 37% of all outstanding jgbs (see chart below). in 2014, it became the biggest jgb holder.
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the flipside of this and the accompanying slide in yields is that japan’s megabanks and major insurers are gradually being pushed out from the bond market (see charts below). this puts them in a tight spot to find stable long-term yields that previously only jgbs and their 30 years or more maturation periods delivered.
corporations, too, are being squeezed out from the government bond market and struggle to find places to park their cash. unwilling to buy newly issued jgbs with negative yields (or to invest in japan as mr abe would like them to), firms rather deposit their money. this pushed up total corporate deposits to a record ¥225tn in fiscal 2015, up 11% from 2014 (see chart below). toyota alone hoards over ¥1tn (roughly $10bn).
but for many, shifting their assets to riskier stockholdings is unlikely. insurers’ equity holdings, for instance, rarely exceed about 15% of their total portfolio, says nicholas benes, representative director of the board director training institute of japan. and after the gpif lost about $50bn in fiscal 2015 following stock market turmoil, risk-averse pension funds and private households will be in no mood for more adventurous portfolio strategies, either.
under present conditions in particular, with the stock market near an all-time high, takuji okubo, chief economist at japan macro advisors, says “i wouldn’t recommend anyone to buy japanese equity right now” – illustrating the tight spot investors find themselves in right now between a dissipating jgb market and a shrinking, de-privatisation-inflated stock market. one of mr abe’s key policy goals to nudge the wider population to become shareholders is being undermined by this as well, making it unlikely that japanese households feel that now is the time to buy shares.
the failure to create a corporate bond market that could offset this tight spot is now coming back to haunt japanese regulators. at ¥58tn, japan’s miniscule corporate bond market amounts to only 2% of the total of japan’s bonds (jgbs plus corporate), equity, and bank debt market (see chart below). in effect, this leaves many “perplexed” as to what to do other than just hold on tight to cash, says mr benes.
it is equally unclear how the central bank’s move into japan inc. ownership will affect corporate governance. as etfs’ low commissions only allow for very limited proxy activism by fund managers, the boj’s direct impact on corporate governance is limited for now, says japan macro advisor’s okubo – particularly as long as the boj’s shareholdings are limited to just roughly 1.5% of japan inc.’s market cap. the gpif and other public investors are currently still more relevant in this regard. but the quick and as of today accelerated accumulation of japanese shares in boj hands warrants a closer look since it comes with very unique characteristics.
bringing the boj into the stock market and inflating prices was meant to buoy firms into borrowing – and investing – more. this has yet to materialise. for now, the downward trend in bank lending (as well as in investment) continues, despite record liquidity provided by the boj and its direct propping up of the stock market (see chart below).
while the hoped for effects thus remain elusive, the negative side effects are more tangible – and will amplify as the boj and public investors pile up shares. the government pension fund, for instance, never signed up to the corporate governance code pushed by the government (it is a part of). the gpif’s investment principles are few and vague (link) and its references to corporate governance amount to “not much”, in benes’ words. but while the gpif is still beholden to some principles and subject to fiduciary obligations – and, in principle, can be sued – none of these options are available against the central bank, he adds.
since a central bank has no fiduciary obligations, it cannot be legally held accountable for its investment decisions. and unlike pension funds, which make long-term investment decisions, the boj is an unpredictable investor: it is unclear when the boj will scale up or wind down its etf program, or how fast. the political climate, for instance, may move against stockholding by the boj as sudden as mr abe pushed it towards activism in 2012. at the same time, this etf-based de-privatisation is undermining the government’s push for more activist shareholding by shrinking the potential for positive selection based on individual company performance, diluting mr abe’s corporate governance reforms.
the boj’s decision on july 29 to up the ante just makes the questions about the effects of these developments more pressing. starting out its program of monetary easing in 2012, the boj also meant to strengthen japan inc. instead, we might end up with inc. japan instead.
a shorter version of this piece has previously appeared in the diplomat (link)