An innovative way to boost its economy by Japan Governor

Bank of Japan Governor Haruhiko Kuroda said last month the bank would buy 300 billion yen 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”.

This would provide incentives for asset managers to come up with some “Abenomics” ETFs which would be full of listed firms that aim to align themselves with the government interest of raising capital expenditure and wages in a bid to revive consumption and the broader economy.

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.

Though demand for such Abenomics ETF might increase due to the upside potential of the price engineered by the government, without emphasising much on the wider fundamentals of these companies, it risks forming a bubble.

Also, the real question also depends on whether the capital from the government is used in productive investments with a high return, which has often not been the case in Japan as shown in the two diagrams below.

 japan governemnt spending
A steady increase of Japan Government spending in 2015.
 japan economic growth
Japan quarterly growth rate has fluctuated in 2015.

 

However, some might argue that Japan’s ETF market is underdeveloped: Barely 100 ETFs exist in Japan, and are found in only three indexes-the Nikkei 225, the Topic and the JPX400. This means pumping additional billions of yen has wider positive implications for ETF-market in Japan which in turn help to boost the economy.

It would indeed be interesting to see how such targeted fiscal measure would help to spur Japan’s economy in the long run.

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