Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>In both my insight last week <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a> and my piece in February <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a>, I suggested that the BOJ would have to soon consider what to do with regard to its ETF allocation policy.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/059/019/original/Screen%20Shot%202018-07-26%20at%205.57.53%20PM.png?1532599088" class="editor-image img-responsive" data-smartkarma-image-id="59019"></figure>
<h2>Last Night Saw Some New News</h2>
<p>A bit over 24 hours ago, a Nikkei article (and a Nikkei Asian Review <a href="https://asia.nikkei.com/Business/Markets/Bank-of-Japan-weighs-rebalancing-ETF-buys" target="_blank">article</a> in English) said <em>"The Bank of Japan will discuss reducing investment in exchange-traded funds that track the Nikkei Stock Average in favor of those that follow broader indexes such as the TOPIX when policymakers meet next week, answering criticism of the BOJ's influence on stock prices."</em></p>
<p><em>The article repeated the point made elsewhere (including in my linked piece) that the BOJ is a top 10 shareholder in almost 40% of listed stocks in Japan. </em></p>
<div class="content-highlight">
<p>On the face of it, the whole issue seems small.</p>
<ul>
<li>Nikkei 225 has a 5-year weekly r-squared to TOPIX of 95.6% and a beta of 1.016. Nikkei 225 to JPNK400 is 95.9% and 1.011. They are not too dissimilar.</li>
<li>The BOJ would simply be NOT BUYING Nikkei 225, and be conducting MORE BUYING of one or both of the other indices.</li>
</ul>
</div>
<p>IF the BOJ goes through with this, the effects are not difficult to model.</p>
<ul>
<li>It would involve a significant drop in the marginal buying of remaining float for the stocks with the lowest amount of true free float. Stocks which could have been expected to see significant buying as a percentage of remaining float such as <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny Holdings (8028 JP)</a>, <a href="https://www.smartkarma.com/entities/13236" target="_blank" data-smartkarma-citation="entities:13236:1">Konami Holdings (9766 JP)</a>, <a href="https://www.smartkarma.com/entities/18107" target="_blank" data-smartkarma-citation="entities:18107:1">Advantest Corp (6857 JP)</a>, etc. would see those numbers drop dramatically.
<ul>
<li>FamilyMart UNY would still be high, in the 7-10% range, depending on the shape of the shareholder group which tenders into the Tender Offer by ITOCHU (discussed <a href="https://www.smartkarma.com/insights/itochu-tender-for-familymart-going-ahead-as-planned-but-remember-greedy-bears-get-stuck" target="_blank">here</a>).</li>
<li>The next highest would be a relatively small stock <a href="https://www.smartkarma.com/entities/26753" target="_blank" data-smartkarma-citation="entities:26753:1">RENOVA Inc (9519 JP)</a> at 4.1%. </li>
</ul>
</li>
<li>By my calculations, if the BOJ replaced all Nikkei 225 buying with TOPIX, no stocks within the top 1000 market cap names in Japan would see remaining "real float" shrink by more than 3% in the next year under the BOJ's current ETF buying program (assuming prices stayed stable). If the BOJ replaced all Nikkei 225 buying with JPNK400, it would reduce ADV impact on some smaller stocks and the largest float reduction among the top 1000 names would be ~3.2%.</li>
</ul>
<div class="content-highlight">
<p>But there are <strong>Other Interesting Residual and Collateral Issues</strong> in the background. </p>
<ul>
<li>While the effects above would be generally salutary, they do not solve the problem that the BOJ currently OWNS 30-40% of the "free float" of many names, and up to 60-70% on a few.</li>
<li>And there are other issues.</li>
</ul>
</div>
<p>The series on the BOJ-Nikkei225 issues includes the following insights (click the link to go to any of them)</p>
<div>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2">
<h2>The Last Year of Insights in the BOJ vs Nikkei 225 ETF Series</h2>
</td>
</tr>
<tr>
<td><em>26 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what" target="_blank" data-smartkarma-citation="insights:22315">JAPAN PASSIVE:  Who Owns What?</a></em></td>
</tr>
<tr>
<td><em>23 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-the-nikkei-225-baskets-if-boj-changes" target="_blank" data-smartkarma-citation="insights:22367">JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes</a></em></td>
</tr>
<tr>
<td><em>19 July 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a></em></td>
</tr>
<tr>
<td><em>24 April 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-update-on-the-boj-and-its-etf-buying" target="_blank" data-smartkarma-citation="insights:19628">JAPAN PASSIVE:  Update on the BOJ and Its ETF Buying</a></em></td>
</tr>
<tr>
<td><em>12 Feb 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/trading-the-boj-nikkei-225-baskets" target="_blank" data-smartkarma-citation="insights:17602">Trading the BOJ-Nikkei 225 Baskets</a></em></td>
</tr>
<tr>
<td><em>4 Feb 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a></em></td>
</tr>
<tr>
<td><em>12 Jan 2018</em></td>
<td><em><a href="https://www.smartkarma.com/insights/fast-retailing-still-squeezable" target="_blank" data-smartkarma-citation="insights:16756">Fast Retailing:  Still Squeezable</a></em></td>
</tr>
<tr>
<td><em>19 Jul 2017</em></td>
<td><em><a href="https://www.smartkarma.com/insights/japan-passive-the-boj-and-japan-etfs" target="_blank" data-smartkarma-citation="insights:12181">JAPAN PASSIVE:  The BOJ and Japan ETFs</a></em></td>
</tr>
</tbody>
</table>
<hr>
<p>Discussion of the change in flows, the timing, and Other Interesting Residual and Collateral Issues follows below.</p>
</div>

In both my insight last week JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225 and my piece in February The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?, I suggested that the BOJ would have to soon consider what to do with regard to its ETF allocation policy.

Last Night Saw Some New News
A bit over 24 hours ago, a Nikkei article (and a Nikkei Asian Review article in English) said "The Bank of Japan will discuss reducing investment in exchange-traded funds that track the Nikkei Stock Average in favor of those that follow broader indexes such as the TOPIX when policymakers meet next week, answering criticism of the BOJ's influence on stock prices."
The article repeated the point made elsewhere (including in my linked piece) that the BOJ is a top 10 shareholder in almost 40% of listed stocks in Japan. 

On the face of it, the whole issue seems small.

Nikkei 225 has a 5-year weekly r-squared to TOPIX of 95.6% and a beta of 1.016. Nikkei 225 to JPNK400 is 95.9% and 1.011. They are not too dissimilar.
The BOJ would simply be NOT BUYING Nikkei 225, and be conducting MORE BUYING of one or both of the other indices.


IF the BOJ goes through with this, the effects are not difficult to model.

It would involve a significant drop in the marginal buying of remaining float for the stocks with the lowest amount of true free float. Stocks which could have been expected to see significant buying as a percentage of remaining float such as Fast Retailing (9983 JP), Familymart Uny Holdings (8028 JP), Konami Holdings (9766 JP), Advantest Corp (6857 JP), etc. would see those numbers drop dramatically.

FamilyMart UNY would still be high, in the 7-10% range, depending on the shape of the shareholder group which tenders into the Tender Offer by ITOCHU (discussed here).
The next highest would be a relatively small stock RENOVA Inc (9519 JP) at 4.1%. 


By my calculations, if the BOJ replaced all Nikkei 225 buying with TOPIX, no stocks within the top 1000 market cap names in Japan would see remaining "real float" shrink by more than 3% in the next year under the BOJ's current ETF buying program (assuming prices stayed stable). If the BOJ replaced all Nikkei 225 buying with JPNK400, it would reduce ADV impact on some smaller stocks and the largest float reduction among the top 1000 names would be ~3.2%.


But there are Other Interesting Residual and Collateral Issues in the background. 

While the effects above would be generally salutary, they do not solve the problem that the BOJ currently OWNS 30-40% of the "free float" of many names, and up to 60-70% on a few.
And there are other issues.


The series on the BOJ-Nikkei225 issues includes the following insights (click the link to go to any of them)





The Last Year of Insights in the BOJ vs Nikkei 225 ETF Series



26 July 2018
JAPAN PASSIVE:  Who Owns What?


23 July 2018
JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes


19 July 2018
JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225


24 April 2018
JAPAN PASSIVE:  Update on the BOJ and Its ETF Buying


12 Feb 2018
Trading the BOJ-Nikkei 225 Baskets


4 Feb 2018
The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?


12 Jan 2018
Fast Retailing:  Still Squeezable


19 Jul 2017
JAPAN PASSIVE:  The BOJ and Japan ETFs




Discussion of the change in flows, the timing, and Other Interesting Residual and Collateral Issues follows below.


JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely

<p>On Friday, MOTHERS-listed Japanese renewable  energy (solar and biomass currently, with plans for wind (offshore and onshore), and geothermal) generator/operator <a href="https://www.smartkarma.com/entities/26753" target="_blank" data-smartkarma-citation="entities:26753:1">RENOVA Inc (9519 JP)</a> <a href="http://v4.eir-parts.net/v4Contents/View.aspx?cat=tdnet&amp;sid=1558927" target="_blank">announced</a> (J only) that the TSE had approved its listing on the TSE's First Section as of February 23rd, the one-year anniversary of the company's listing. This is the fastest possible route the company could have taken to TSE1 other than a direct listing. The company announced in mid-November that it had made an…</p>

On Friday, MOTHERS-listed Japanese renewable  energy (solar and biomass currently, with plans for wind (offshore and onshore), and geothermal) generator/operator RENOVA Inc (9519 JP) announced (J only) that the TSE had approved its listing on the TSE's First Section as of February 23rd, the one-year anniversary of the company's listing. This is the fastest possible route the company could have taken to TSE1 other than a direct listing. The company announced in mid-November that it had made an…

Renova (9519 JP) - TOPIX Inclusion Is Well-Flagged. Stock Is Expensive. But May Be Squeezy

Japan

RENOVA, Inc. is mainly engaged in operating and managing solar power, biomass power, wind power (onshore and offshore), and geothermal power generations.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

RENOVA Inc (9519 JP)

JAPAN PASSIVE - BOJ To Buy Less Nikkei 225? Highly Likely

In both my insight last week JAPAN PASSIVE: BOJ Heading For Trouble with Nikkei 225 and my piece in February The BOJ's Ongoing ETF Impact - Is a...

Travis Lundy

Renova (9519 JP) - TOPIX Inclusion Is Well-Flagged. Stock Is Expensive. But May Be Squeezy

On Friday, MOTHERS-listed Japanese renewable energy (solar and biomass currently, with plans for wind (offshore and onshore), and geothermal)...

Travis Lundy

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)