Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Down 24% From February Peak, But Still Has a Long Way to Go Before The Longs Get Back On Board

JPX-Nikkei 400 Rebalance: Pre-Event Basket Adjustments for March-End

Fast Retailing: Trying to Pass Benefits of Cost Cutting to Customers

Changes In BOJ ETF Buying - Which Stocks Impacted and How?

Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology

Gravity Works As WeWork Doesn't; Now Plan B

Quiddity Advisors

Event-Driven

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 
<div class="content-highlight">
I published a quick analysis of the <a href="https://www.smartkarma.com/insights/changes-in-boj-etf-buying-which-stocks-impacted-and-how" target="_blank" data-smartkarma-citation="insights:49331" rel="noopener">Changes In BOJ ETF Buying - Which Stocks Impacted and How?</a> 
</div>
On Friday 19 March, the BOJ met and after the MPC Meeting published...
<ul>
<li>The policy statement for this release, <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319a.pdf" target="_blank" rel="noopener">Further Effective and Sustainable Monetary Easing</a>
</li>
<li>a <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319c.pdf" target="_blank" rel="noopener">Background</a> to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.
</li>
<li>a nifty <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319b.pdf" target="_blank" rel="noopener">two-pager powerpoint presentation</a> of the Background</li>
<li>and a document called <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210319c.pdf" target="_blank" rel="noopener">Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending"</a> which also contains the change in wording for the QQE</li>
</ul>
This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 
<div class="content-highlight">
I looked at the methodology and numbers and proposed a model in <a href="https://www.smartkarma.com/insights/quantifying-the-boj-change-in-etf-policy-assessing-future-etf-buying-methodology" target="_blank" data-smartkarma-citation="insights:49434" rel="noopener">Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology</a> 
</div>
The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a> fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In <a href="https://www.smartkarma.com/insights/boj-etf-buying-composition-clarified" target="_blank" data-smartkarma-citation="insights:38898" rel="noopener">BOJ ETF Buying Composition Clarified</a> in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.
<div class="content-highlight">
The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 
</div>
<ul>
<li>Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)</li>
<li>Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. </li>
</ul>
But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold.

The Nikkei wrote an article last Thursday 18 March 2021 saying the BOJ would change its monetary/quantitative easing policy after having commenced a review in December.
The general idea was a slight curve steepening allowance made "to allow banks to be more profitable" and a change to the way ETF buying was conducted. 

I published a quick analysis of the Changes In BOJ ETF Buying - Which Stocks Impacted and How? 

On Friday 19 March, the BOJ met and after the MPC Meeting published...

The policy statement for this release, Further Effective and Sustainable Monetary Easing

a Background to the policy change which discussed the work they did called the Assessment for Further Effective and Sustainable Monetary Easing.

a nifty two-pager powerpoint presentation of the Background
and a document called Establishment of "Principal Terms and Conditions of the Interest Scheme to Promote Lending" which also contains the change in wording for the QQE

This showed there was some subtlety in the methodology, but it also showed some of the restrictions that the BOJ would place on itself in how it decided when and how much ETF buying to do. 

I looked at the methodology and numbers and proposed a model in Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology 

The market reaction on some high-Nikkei weight stocks on Thursday afternoon and particularly Friday afternoon was striking. Fast Retailing (9983 JP) fell 5.2% in significant volume in the 30 minutes after the announcement.
The balance of ETF buying since the BOJ lifted its buying amount from ¥6 trillion annually to ¥12 trillion in mid-March 2020 in the covid-crash has been as would have been expected. From the 20th of March 2020 through the 19th of March 2021, the BOJ bought ¥5.29trln of regular ETFs of these three indices (and ¥290bn of ETFs to Support Investment in Physical &amp; Human Capital).
In BOJ ETF Buying Composition Clarified in April 2020, I noted the mix was at that time likely to be 90.5% TOPIX, 8.9% Nikkei 225, and 0.6% JPX Nikkei 400. By my calculation, reconstructing the purchases every day based on the rules, the purchase amount over the past year has been 90.4% TOPIX, 9.1% Nikkei 225, and 0.6% JPX Nikkei 400. Given that the BOJ owns most of the ETFs outstanding of these three indices, it would have been difficult to see substantial deviation from that rate.

The question is whether the change dramatically impacts stocks going forward.
The easy arithmetic answer is.... no. 


Assuming the BOJ were to buy the same amount, TOPIX would see a 10.7% increase in allocations to TOPIX ETFs (from 90.4% to 100.0%)
Nikkei 225 and JPX Nikkei 400 ETFs get nothing. But Nikkei 225 stocks are, by definition, also members of TOPIX, and the vast majority of JPX Nikkei 400 stocks are too. 

But there is some subtlety here too.
What it really means, however, is that traders and investors cannot count on incremental BOJ demand over the next year to be a material part of remaining Real World Float. This is more a problem of expected support being withdrawn.
Analysis on this below the fold. 

Quantifying BOJ Change in ETF Policy: Affecting Single Stocks