Photographer: Philip Fong/AFP/Getty Images

Japans Nikkei 225 Stock Average and its largest-weighted firm, Uniqlo operator Fast Retailing Co., tumbled in Tokyo after the Bank of Japan unexpectedly tweaked its stock-buying program to only purchase funds tracking the broader Topix index.

The change brings an end to a controversial, decade-long program in which the bank has bought ETFs tracking the Nikkei 225, a gauge criticized for a composition that gives weight to the arbitrary value of an individual stock price. The central bank has over the years faced opprobrium for how its purchases have warped markets — which has benefited Fast Retailing more than other equities.

The Uniqlo operator, which has been the largest stock on the index for the last decade with an 11% weighting as of Friday, tumbled 6.1%, the most since March, after the BOJs announcement.

That helped drag the Nikkei 225 1.4% lower. The NT ratio, calculated by dividing the blue-chip gauge by the broader Topix Index, slumped after the BOJ announcement to levels last seen in November.

The mood in the market had already been in favor of the Topix, which tends to have more cheap valuation stocks, whereas the Nikkei 225 has more growth stocks, said Shogo Maekawa, a strategist at JP Morgan Asset Management in Tokyo. With the BOJ move, this kind of trend could strengthen.

The central banks purchases of Nikkei 225 ETFs had

long been controversial. The BOJ has bought ETFs including the Nikkei 225 since it

started its stock-fund purchase program in 2010.

Like the Dow Jones Industrial Average, the Nikkei 225 is a price-weighted gauge, with a companys weighting in the index largely decided by how much an individual share is worth. Over the years, Governor Haruhiko Kuroda has faced criticism that the program favored the few stocks heavily weighted on the index. In response, he has gradually reduced purchases of funds tracking the Nikkei 225, tweaking once in

2016 and again in

2018, to more heavily favor the Topix.

Swings and Roundabouts

BOJ focusing purchases on Topix has different effect on these Nikkei 225 members

Source: Bloomberg

Note: Data as of March 19, 2021

Concern arose once more earlier this year after shares in Fast Retailing

topped 100,000 yen ($918) each to a record, further increasing the firms influence over the gauge even as the index exceeded 30,000 for the first time since the bursting of the economic bubble in the early 1990s.

While the BOJs influence on the Nikkei has already been dwindling, the central banks removal of support for the index could have wide-reaching implications.

We think there is huge room for the broader market to outperform the Nikkei 225, Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore, wrote in a note. He

expects the Topix to do better than the Nikkei in 2021. The Nikkei 225s relative out-performance against Topix which has continued for 15 years is coming to an end, he wrote.

Todays move also further erodes the relevance of the JPX-Nikkei 400 Index, a gauge initially

designed to shame executives into improving corporate governance. The BOJ

started purchasing the index in 2014, but todays announcement is another blow for a measure that has failed to fulfill its billing.

With assistance by Shoko Oda, Min Jeong Lee, James Mayger, and Cormac Walsh

(Adds analyst comment in ninth paragraph)

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