Delivering Global Macro Investment Insights

DeSaque Macro Research

DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the view to delivering global macro investment insights aimed at providing new ideas to clients.

Said DeSaque has over 26 years of experience working as a professional economist in financial services. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist at Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he eventually became Head of the London Economics Department.

Said takes a very keen interest in international relations, along with their implications for economic development. His research interests include the economic transformation of China and its implications for global capital markets, particularly in the United States. He is a member of Chatham House in London.

The US economy and capital markets have historically been Said’s main focus of attention. He frequently presents his views to institutional investors in diverse geographic locations. In recent years, Said has also been carefully monitoring economic developments in Asia, particularly China and Japan.

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Global Economist, DeSaque Macro Research

Said Desaque

Global Economist

Macroeconomics

<p>The Bank of Japan (BoJ) has become the largest single holder of exchange traded funds (ETFs), but their recent decision to commence an ETF lending scheme highlights the issue of the sustainability of large asset purchases. Hitherto, there has not been extensive work conducted on the impact of BoJ ETF purchases on either corporate behaviour or the real economy.</p>
<div>Previous direct equity purchases (2002/4 &amp; 2009/10) by the BoJ were aimed at stabilising the banking and financial systems as opposed to easing monetary conditions. Indirect purchases of equities via ETFs were introduced as part of Comprehensive Monetary Easing in 2010 by former Governor Shirakawa with the aim to encourage greater risk-taking by the private sector. </div>
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<div>Governor Kuroda significantly boosted asset purchases, including ETFs, upon his arrival in 2013 with the view to achieving the newly-established 2% inflation target within two years. Subsequently, ETF purchases were tripled due to the economic relapse following the imposition of a higher sales tax in April 2014. Thereafter, in July 2016, ETF acquisitions were doubled to counter new global economic uncertainties, but the failure of inflation to reach the 2% target means that Governor Kuroda's large-scale asset purchase programme failed in its primary objective. </div>
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<div>Prior to September 2016, BoJ ETF purchases were in proportion to the market capitalisations of the Nikkei 225, TOPIX and JPX-Nikkei 400, but, under this framework, small cap constituents in the price-weighted Nikkei 225 benefited more than the market capitalisation-weighted TOPIX. Thereafter, BoJ purchases became increasingly skewed towards TOPIX ETFs to mitigate complaints about rising market distortions. </div>
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<div>Although the Japanese equity market initially reacted bullishly to the prospect of massive monetary easing, other factors such as negative interest rates and exchange rate appreciation from 2016 were seemingly able to offset the beneficial impact of ETF purchases. Since late-2016, Japanese equities have been influenced by a confluence of factors, including the impact yield curve control on the exchange rate and a strong influence from US equities. </div>
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<div>Massive monetary easing under Governor Kuroda has not produced a repeat of the P/E multiple expansion seen during the bubble economy, possibly due to doubts about the ability of Abenomics to produce a sustained rise in corporate profits. BoJ ETF purchases appear to have impacted the valuation of small-cap companies included in the Nikkei 225, whose valuations are at a premium to the benchmark index. </div>
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<div>Under its ETF programme, the BoJ has become a very large and passive shareholder who may inadvertently delay the arrival of corporate governance reforms demanded by investors. Foreign investors dominate trading volume and this group could ultimately determine the success of the BoJ's ETF lending scheme, which is aimed at enhancing the sustainability of asset purchases. Yield curve control will be the main tool through which any further monetary policy easing is introduced.  </div>
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The Bank of Japan (BoJ) has become the largest single holder of exchange traded funds (ETFs), but their recent decision to commence an ETF lending scheme highlights the issue of the sustainability of large asset purchases. Hitherto, there has not been extensive work conducted on the impact of BoJ ETF purchases on either corporate behaviour or the real economy.
Previous direct equity purchases (2002/4 &amp; 2009/10) by the BoJ were aimed at stabilising the banking and financial systems as opposed to easing monetary conditions. Indirect purchases of equities via ETFs were introduced as part of Comprehensive Monetary Easing in 2010 by former Governor Shirakawa with the aim to encourage greater risk-taking by the private sector. 

Governor Kuroda significantly boosted asset purchases, including ETFs, upon his arrival in 2013 with the view to achieving the newly-established 2% inflation target within two years. Subsequently, ETF purchases were tripled due to the economic relapse following the imposition of a higher sales tax in April 2014. Thereafter, in July 2016, ETF acquisitions were doubled to counter new global economic uncertainties, but the failure of inflation to reach the 2% target means that Governor Kuroda's large-scale asset purchase programme failed in its primary objective. 


Prior to September 2016, BoJ ETF purchases were in proportion to the market capitalisations of the Nikkei 225, TOPIX and JPX-Nikkei 400, but, under this framework, small cap constituents in the price-weighted Nikkei 225 benefited more than the market capitalisation-weighted TOPIX. Thereafter, BoJ purchases became increasingly skewed towards TOPIX ETFs to mitigate complaints about rising market distortions. 


Although the Japanese equity market initially reacted bullishly to the prospect of massive monetary easing, other factors such as negative interest rates and exchange rate appreciation from 2016 were seemingly able to offset the beneficial impact of ETF purchases. Since late-2016, Japanese equities have been influenced by a confluence of factors, including the impact yield curve control on the exchange rate and a strong influence from US equities. 


Massive monetary easing under Governor Kuroda has not produced a repeat of the P/E multiple expansion seen during the bubble economy, possibly due to doubts about the ability of Abenomics to produce a sustained rise in corporate profits. BoJ ETF purchases appear to have impacted the valuation of small-cap companies included in the Nikkei 225, whose valuations are at a premium to the benchmark index. 



Under its ETF programme, the BoJ has become a very large and passive shareholder who may inadvertently delay the arrival of corporate governance reforms demanded by investors. Foreign investors dominate trading volume and this group could ultimately determine the success of the BoJ's ETF lending scheme, which is aimed at enhancing the sustainability of asset purchases. Yield curve control will be the main tool through which any further monetary policy easing is introduced.  














The BoJ's ETF Purchases: Limited Impact on Real Economy, but Not Devoid of Consequences for Equities