(Bloomberg) -- The Bank of Japan has scooped up so many shares of the nation’s exchange-traded funds that it effectively owns a controlling stake in the market. Now investors are considering a future in which it buys less.

BOJ watchers expect the central bank to slowly cut its ETF purchases, now targeted at 6 trillion yen ($54 billion) annually, in what could be viewed as an expansion of its stealth tapering. The BOJ’s bond buying has already fallen to nearly half of its targeted pace.

The BOJ maintained its ETF target at its meeting last month but said the volume of buying would depend on market conditions. That was one of several tweaks meant to address the side effects of its monetary policy, which include distortions in the bond and equities markets.

"Regardless of whether they’ll announce it outright, I expect the BOJ to move toward buying less,” said Nana Otsuki, chief analyst at Monex Inc. in Tokyo, referring to ETFs.

‘Tokyo Whale’

There is certainly less to buy. As of the end of October, the BOJ owned 74 percent of the ETF market, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg.

The central bank’s buying has earned it the nickname "Tokyo whale." It now holds stakes of more than 10 percent in 27 listed companies, including 19 percent of Advantest Corp., 17 percent of Fast Retailing Co. and 16 percent of TDK Corp., according to estimates by Nomura Holdings Inc., the nation’s largest broker.

The BOJ’s market dominance has drawn criticism from the head of the country’s stock exchange and the chairman of the Japanese Bankers Association.

The central bank’s bond purchases may offer a guide to how it proceeds with ETFs. It has nominally kept its 80 trillion yen annual target for increasing its holdings of Japanese government bonds, but in reality its buying has slowed to just over half that: 46.5 trillion yen.

The BOJ bought 5.9 trillion yen of ETFs in 2017 after doubling its purchase target in July 2016.

At its July meeting, the central bank decided to shift more of its buying to the broader Topix equities index, and away from the blue-chip focused Nikkei 225 Stock Average.

But that won’t be enough to address the market distortions caused by its enormous volume of purchases, said to Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute Co. in Tokyo.

‘Superficial’ Shift

“The shift toward Topix index-linked funds is superficial, and tweaking that percentage toward the Topix doesn’t change anything,” Hirakawa said. “Fundamentally, if you want to stop the side effects, you need to purchase less.”

Hirakawa speculated that the volume of the BOJ’s buying on a given day may not change, but it would buy less frequently.

"Until now, if the market had fallen 0.1 percent in morning trading, the BOJ tended to buy," he said. "But that threshold might be changed to 1 percent."

The BOJ still wants to suppress the risk premium for equities investors, so won’t want to jolt the market as it cuts back on purchases, said Masaki Kuwahara, senior economist at Nomura Securities Co.

"As with the case with the bond stealth tapering, I think they’ll make sure that the market isn’t overly affected," Kuwahara said. "With bonds they’ve made sure that yields didn’t go up too much as they cut the purchase amounts."

Since the BOJ’s decision, the Japanese stock market has been lackluster, with the Nikkei 225 falling 1.1 percent, and the Topix declining 1.9 percent through Friday.

--With assistance from Min Jeong Lee.

To contact the reporter on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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