The Bank of Japan’s Stock Holdings and Long-term Returns

The Bank of Japan (BoJ) purchased equity index exchange-traded funds (ETFs), including Nikkei 225 ETFs, for over a decade and has not sold any ETFs it purchased. On March 31, 2021, the BoJ’s ETF holdings were more than 10% of the free float of the First Section of the Tokyo Stock Exchange. Primarily because the Nikkei index is price-weighted, the BoJ’s indirect holdings as a percentage of the market capitalization vary widely among individual stocks. To identify the effects of the uneven demand shocks, this paper runs instrumental-variable cross-sectional regressions of cumulative returns between September 30, 2010, a few days before the first announcement of ETF purchases, and March 31, 2021, when the BoJ terminated Nikkei 225 ETF purchases. The results suggest that the price multiplier is around 6 to 9; a 1 percentage point higher BoJ share in a stock’s market capitalization is associated with a roughly 6 to 9 percentage point higher return. The estimated multiplier is much higher than a typical estimate of 1 based on U.S. data. There is no evidence of a return reversal in the 9 months after Nikkei 225 ETF purchases ended. Various analyses, including monthly return regressions, support the analysis of cumulative returns and provide additional insights.