Asymmetric Returns: Nikkei 225 Index Outperforms TOPIX Index

09/28/16

By SGX

• Japanese benchmark Nikkei 225 Index diverges from the TOPIX Index as the Nikkei-TOPIX ratio achieves the highest level since 1999 on the back of central bank ETF purchases.
• The Bank of Japan stimulus programme favours the Nikkei 225 Index since more than half of eligible ETF assets under management are marked to the Nikkei 225 Index.
• According to the Reuters Corporate Survey, Japanese corporates are “disappointed” with the fiscal stimulus unveiled by Prime Minister Abe, while market expectations for more stimulus measures resulting from the Bank of Japan September meeting have increased.

Nikkei 225 Index Breaks Away From TOPIX Index

Divergence between the two major Japanese equities benchmarks, the Nikkei 225 Index and the TOPIX Index, accelerated over the past month following the central bank policy meeting at the end of July. On 29 July, the Bank of Japan (BOJ) effectively doubled its firepower when it increased its annual ETF buying target from 3.3 trillion yen (US$33 billion) to 6 trillion yen (US$60 billion).

The BOJ specifies that its ETF purchases are limited to those tracking certain Japanese equity indices, namely the Nikkei 225 Index, the TOPIX Index, and the JPX-Nikkei 400 Index. The Nikkei 225 Index has turned out to be the largest beneficiary from the BOJ ETF programme due to the relatively large assets under management (AUM) of the Nikkei 225 Index ETFs.

Figure 1: Assets Under Management of BOJ-Eligible ETFs by Underlying Index

Source: Bloomberg, 23 August 2016

Domestically-listed ETFs based on the Nikkei 225 Index account for approximately 56% of the ETF universe eligible for the central bank purchase programme. Since the BOJ specifies that “the Bank's purchase would roughly be proportionate to the total market value of that ETF issued”, the largest proportion of the BOJ’s ETF purchases are those that track the Nikkei 225 Index. CLSA‘s Nicholas Smith estimates that 55% of ETF purchases are the Nikkei 225 stocks versus only 41% for the TOPIX.

The central bank’s ETF purchase programme has resulted in market asymmetries, most obvious of which is the outperformance of the Nikkei 225 Index over the TOPIX Index. Last week, the Nikkei-TOPIX ratio (NT Ratio), a measure derived by dividing the index level of the Nikkei 225 Index by the index level of the TOPIX Index, achieved the highest level in 17 years of 12.8.

Figure 2: Performance of Nikkei 225 Index and TOPIX Index (Base = 4 Jan 2012)

Source: Bloomberg, 23 August 2016

Figure 3: NT Ratio = Nikkei 225 Index / TOPIX Index

Source: Bloomberg, 23 August 2016

PM Abe “Disappoints” With Latest Stimulus

Earlier this month, Prime Minister Abe announced 4.6 trillion yen (US$45 billion) in new government spending this fiscal year in a bid to shore up the economy and overcome deflation. The package includes US$24.5 billion in welfare spending, while 22 million low income individuals will receive US$147 each.

Japanese companies were reportedly underwhelmed by the stimulus announcement and believe there will be little economic impact, according to the Reuters Corporate Survey conducted from 1 to 16 August 2016. Market sentiment remained poor over the month with last week’s worse-than-expected second quarter GDP figures. On a quarter-on-quarter basis, the economy showed no growth versus economist expectations of a 0.2% rise.

Figure 4: Japan Quarter-on-Quarter GDP (%)

Source: Bloomberg, 23 August 2016

Market expectations for more stimulus at the upcoming 20 and 21 September BOJ policy meeting have grown. According to an interview published by Japan’s Sankei newspaper, BOJ Governor Kuroda said results of a comprehensive policy review will be published and that there is “sufficient chance” the central bank will add to its easing in the September meeting.

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Cross-Product Margin Offsets

Source: SGX (data as of 23 August 2016)

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