TOKYO Japan's central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well -- to the point where asset managers are looking to design investment funds with the Bank of Japan in mind.
The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home.
The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.
"We're willing and considering to add such a product," said Kohei Sasaki, manager of ETF promotion at Mitsubishi UFJ Kokusai Asset Management.
"We've already contacted index vendors on this matter."
Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation.
So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank's zero interest rates and a weak yen.
Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were "proactively making investment in physical and human capital".
Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some "Abenomics" ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy.
"We've already started trying to develop some kind of solution to the demand," said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.
"However, it's not yet known whether this is feasible. You can't be dogmatic when it comes to developing a new index. You need to know what kind of index the BOJ and the ETF providers really want," he said.
The Bank of Japan, which already owns about half of all Japanese ETFs, has said it will focus some of its stepped-up purchases on the JPX-Nikkei 400 (JPXN.P) index, which reflects a separate government goal to improve corporate governance and is not a neat fit for an Abenomics ETF.
JPX-Nikkei 400 comprises firms that promote transparency, return on equity and strong governance - not necessarily those that invest heavily in their businesses and their staff.
The most heavily weighted firms in this index include Japan Tobacco (2914.T), carmaker Honda Motor Co Ltd (7267.T) and telecoms firms Nippon Telegraph and Telephone Corp (9432.T), KDDI Corp (9433.T) and Softbank Group (9984.T).
Mizuho Securities has sought to come up with some metrics for choosing companies for an Abenomics index, based on capital expenditure and investment in human resources - though it acknowledges the latter is a very difficult criteria to measure.
Using growth in personnel costs as rough guide, Mizuho identified some firms that might be candidates for an Abenomics ETF, including mobile game developer Colopl (3668.T), sports-wear maker Asics Corp (7936.T), office supplies firm Askul Corp (2678.T) and biofuel company Euglena Co Ltd (2931.T).
The Bank of Japan plans to step up buying of ETFs in April, giving financial institutions time to answer its call.
"Even for asset managers that have the necessary experience, it would take at least a few months before one can launch a new ETF," said Koei Imai, who runs ETFs at Nikko Asset Management.
(Writing by Lisa Twaronite; Additional reporting by Leika Kihara and Hideyuki Sano; Editing by William Mallard and Mark Bendeich)