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BOJ changes share purchase rules (good news)

Updated: Feb 14, 2023

The BOJ announced in March that it would abandon its ¥6tn ($55bn) annual target for exchange traded fund purchases and cease buying ETFs tracking the Nikkei 225 and Nikkei 400 indices. At the same time, the BOJ said it would retain the ¥12tn upper limit for ETF purchases.

This announcement is a positive development for the Fund. The Nikkei 225 index uses an antiquated price weighting methodology and is dominated by Fast Retailing which has an index weight of 10.5% (at 31 March 2021). In contrast, the largest constituent of the Topix is Toyota Motor with a 3.1% weight. Focusing solely on the Topix will reduce price distortions resulting from BOJ purchases.

Potentially smaller BOJ purchases will also facilitate price discovery. Put differently, it will help narrow the gap between market capitalisations and fundamental values. This should benefit the Fund given its stock selection process is based on a range of fundamentally derived quant factors.

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