BOJ’s Mounting Stock Holdings Undermine Healthy Market Function

The Bank of Japan’s holdings of exchange-traded funds (ETFs) have ballooned, raising severe concerns about distortions in the stock market.

Things may have reached the point where the government should seriously consider measures to vitalize the market so that the central bank can stop buying stocks to support it.

In the interim settlement of accounts for the first-half period ending in September 2020, the outstanding balance of ETFs held by the central bank was about 34 trillion yen at the price at which they were obtained, up about 25% from the same period last year. On a market value basis, it exceeds 40 trillion yen.

In December 2010, the central bank began to purchase ETFs linked to stock indexes such as the Tokyo Stock Price Index (TOPIX) and the Nikkei Stock Average as part of its large-scale monetary easing measures.

Since then, the central bank has gradually increased the amount of ETF purchases. In March this year, when stock prices fell due to the spread of the novel coronavirus, it expanded its annual purchase limit from 6 trillion yen to 12 trillion yen.

The move appears to have had a certain effect in alleviating investors’ anxiety. But it is not healthy for the central bank itself to become a major buyer of stocks.

Through ETF purchases, the central bank has become a major shareholder, holding more than 10% of shares in 70 companies as of the end of September.

In November, the amount of ETFs held by the central bank was reportedly equivalent to about 7% of the total market value of companies listed in the First Section of the Tokyo Stock Exchange. It is believed that the amount of ETFs held by the central bank has exceeded the total market value of Japanese stocks held by the Government Pension Investment Fund — the independent administrative institution in charge of managing the reserves for public pension plans — making the central bank Japan’s largest shareholder.

As the central bank purchases all stocks that are incorporated into the indexes, its approach is different from a true investment, which takes into account such factors as business performance or growth potential. This appears to impair market function, in which stock prices are determined based on corporate value.

In the case of ordinary companies, the Financial Services Agency has asked shareholders to keep an eye on them, such as by exercising their voting rights. However, as the central bank does not have that function, it could set back corporate governance reform.

As part of their efforts to fight the coronavirus, central banks in the United States and major European countries have also expanded monetary easing measures. But there are no examples of them purchasing stocks.

If stock prices drop sharply in Japan in the future, the Bank of Japan’s financial condition could deteriorate due to possible latent losses. It also faces a dilemma in that selling stocks for liquidation would push down stock prices, therefore, it will have difficulties selling off the stocks.

There is nothing for it but to find ways to gradually release the stocks while avoiding stock market turmoil.

It is necessary to increase the number of stable shareholders to replace the central bank. The government should continue efforts to attract financial assets from households, such as through measures on taxation.

It is also important to create an economic environment in which stock prices naturally rise by boosting corporate growth through digitization or strengthening measures against global warming.

(From The Yomiuri Shimbun, Dec. 4, 2020)