It has been more than 12 years since the Bank of Japan decided to buy exchange traded funds (ETFs), which had been considered a “prohibited move” until then.
Although the huge amount of monetary easing has continued to support the stock market for a long time, there are also harsh voices saying that it is distorting the market and that the government-manufactured market is not sustainable.
And the Bank of Japan, which has a huge amount of ETFs, is effectively the world's largest holder of Japanese stocks.
What kind of risks are there?
And will there be an “exit” in sight?
(Economic Department reporter Aya Shinoda)
Accumulated risk assets
In October 2010, the purchase of ETFs by the Bank of Japan started as a “temporary and unusual” measure during the era of Governor Shirakawa.
The concerns of the BOJ executives at the time that ``there is a danger of becoming a permanent problem'' proved true, and the amount of purchases has continued to increase since then.
And even now, with almost no purchases, it is still positioned as one of the frameworks for large-scale monetary easing.
The book value of ETFs held by the Bank of Japan was 36.9057 trillion yen as of the end of September last year.
Looking at this at the market price, it has risen to 48.208 trillion yen.
There is also a trial calculation that TOPIX accounts for more than 7% of the market capitalization of the Tokyo Stock Price Index constituents.
(Estimated by Shingo Ide, senior researcher at NLI Research Institute)
Also, at this point, the GPIF, which manages public pension reserves, exceeds the market price of Japanese stocks held by the “Pension Reserve Fund Management and Investment Independent Administrative Agency.” I was.
Although it is an indirect holding, it is the world's largest holder of Japanese stocks.
According to Shingo Ide, senior researcher at NLI Research Institute, among the constituent stocks of the ETFs purchased by the BOJ, the actual holding ratio of the BOJ is 20% or more in two companies, ranging from 10% to less than 20%. is 65 companies, and 5% to less than 10% is 401 companies.
Criticized as a “silent shareholder”
The Bank of Japan has come to hold a huge amount of risky assets called ETFs.
What kind of problems are there?
The first is the impact on the governance of investee companies.
The Bank of Japan outsources the ETF purchases to trust banks.
As a result, the name of the shareholder of the company incorporated in the ETF becomes a trust bank, and the Bank of Japan stands behind it as a "substantial shareholder."
However, the exercising of voting rights at general shareholders' meetings is carried out by trust banks based on the instructions of the asset management company, and the Bank of Japan itself is not involved in exercising voting rights and has not indicated its policy.
In fact, the Bank of Japan has "voting guidelines" for trustees (trust banks, etc.).
However, this covers stocks purchased by the Bank of Japan from financial institutions in 2002-2004 and 2009-2010.
This was implemented as a special measure to prevent the management of financial institutions from becoming unstable due to a decline in the value of stocks held, and to stabilize the financial system.
For ETFs, on the other hand, there is no such “guidance”.
Governor Kuroda recognizes that there is no problem because the voting rights will be appropriately exercised by asset management companies that have announced that they will accept the Stewardship Code, but the Bank of Japan is said to be a "silent shareholder", and as it is There is also criticism that continuing to hold shares is a negative for corporate governance reforms.
Concerns about unrealized losses
And the other is the impact on the Bank of Japan's finances.
If the stock price plunges while the BOJ continues to hold the shares, resulting in an unrealized loss at the end of the fiscal year, the BOJ will be forced to make reserves.
In that case, the amount to be paid to the national treasury will be reduced, which may lead to a burden on the people.
Then, at what level does the ETF held by the Bank of Japan have an unrealized loss?
On March 10, 2020, at the House of Councilors Committee on Finance and Monetary Policy, Governor Kuroda answered that the Nikkei Stock Average would be around 19,500 yen when the break-even point is calculated mechanically.
Also, on January 27, 2021, at the House of Councilors Budget Committee, the level was said to be around 21,000 yen.
Shingo Ide, senior researcher at NLI Research Institute, estimates that the break-even point as of the end of last month will be 19,640 yen.
The Nikkei Stock Average as of February 3 is in the 27,000 yen range, so it seems that there is currently a large unrealized gain.
According to Mr. Ide, there was also a temporary unrealized loss.
Although it is not the end of the fiscal year, we estimate that the amount of unrealized losses exceeded 3.5 trillion yen on March 16, 2020, when the global financial markets were severely shaken by the spread of COVID-19.
What is the Bank of Japan's exit strategy?
Unlike government bonds, ETFs do not have maturity dates.
If the BOJ continues to hold the shares in this state, the risks may become apparent, and it will be necessary to sell them at some point.
However, once the BOJ makes a move to sell, it could affect the stock market.
In fact, the Bank of Japan has never sold the ETFs it has purchased.
What is the Bank of Japan's thinking on selling ETFs, in other words, on the exit?
At a press conference on June 20, 2019, Governor Kuroda said,
Governor Kuroda
: "Because ETF purchases are being conducted as part of the ``QQE with Yield Curve Control,'' the ``price stability target'' of 2% has naturally been achieved. At times, there will
be discussions about exits as a whole."
In other words, we will not discuss exits by cutting out ETF policies, but we will consider them within the exit strategy of the current monetary policy as a whole. .
At a recent press conference, Governor Kuroda indicated that the BOJ would not scale back its ETF purchases or pursue an exit policy.
In the case of sale, there is also a view that it will take 100 years
How should the Bank of Japan, which holds a huge amount of ETFs, respond in the future?
Ask an expert...
Takahide Kiuchi Executive Economist, Nomura Research Institute
“Holding a huge amount of ETFs means continuing to carry a large amount of risk, and in a sense it is like holding a “bomb”.
There is no option to keep it.
In order to limit the impact on the stock market, if we were to sell only about 300 billion yen a year, it would take more than 100 years, so this is also not realistic.
Perhaps we should explore an "off-balance" path that separates us from the balance sheet.
Either way, it's a tough road."
Shingo Ide, senior researcher at NLI Research Institute,
"In order to avoid the negative shock of a stock price crash, it seems that we are forced to leave a purchase limit. It will take 100 years to sell 500 billion yen a year.There is an idea to sell it to the public with a discount on the condition of long-term ownership, but it will be costly and time-consuming, and it will not be easy.”
Future options and risks still need discussion
An ETF held by the Bank of Japan with a market value of 48 trillion yen.
If you calculate it per citizen, it will be overwhelmed by the size of about 400,000 yen.
I was surprised when two experts pointed out that it would take 100 years to sell the ETFs accumulated over the past 12 years.
On the other hand, as experts point out, there are also voices saying that ETFs should be used as public assets.
What options are there, and what are the risks?
I think it is necessary to promote a wide range of discussions toward the future.
attention schedule
On February 8, Japan's balance of payments statistics (December 2022) will be released.
As the huge trade deficit continues, the current account surplus is expected to decline significantly, which is attracting attention.
Financial results of major companies such as Softbank Group will be announced on the 7th, and Toyota Motor Corporation and Nissan Motor will be announced on the 9th.