How the BOJ Has Affected Domestic Equity Markets by Its ETF Purchasing Program

Abstract

The Bank of Japan (BOJ) started a program to purchase domestic equity indexlinked ETFs in December 2010 to stimulate the sluggish economy after the 2007-8 financial crisis. It initially set an annual limit of 0.45 trillion yen. It was also a temporary program, which would terminate by the end of 2011. The BOJ, however, has continued to purchase ETFs and dramatically increased an annual target value to 6 trillion yen since July 2016. The BOJ tended to buy ETFs when opening stock price indices declined. The Nikkei Stock Average (NSA) is the most popular stock index in Japan, and it is price-weighted. By purchasing NSA-linked ETFs massively, the BOJ seems to have affected the NSA’s component stocks’pricing and created an “indexing effect.”