Photographer: Tomohiro Ohsumi/Bloomberg

What Should the BOJ Do About Its Towering ETF Pile? Nothing

  • BOJ now owns about two-thirds of the nation’s ETF market
  • ‘They don’t have to sell,’ says S&P Dow Jones Indices CEO

Here’s something the Bank of Japan could do as pressure builds to address its towering pile of equity holdings. Nothing.

Sounds radical, but a case exists for locking up and forgetting the more than 13 trillion yen ($119 billion) worth of exchange-traded funds it has bought, about two-thirds of the country’s ETF market, since late 2010. The bank could just keep all the securities, which were purchased as part of Governor Haruhiko Kuroda’s stimulative “bazookas” to pump up inflation.

“They don’t have to sell,” Alex Matturri, chief executive officer of S&P Dow Jones Indices LLC, said in an interview during a visit to Tokyo. “You don’t have to liquidate that, you can just hold onto it forever. Equity could last forever.”

The no-exit strategy gets mentioned now and then by a minority of Japan experts who note that, unlike debt instruments bought under quantitative easing, equities don’t have maturities. Peter Tasker, long-time Japan hand and founding partner of hedge fund Arcus Investment Ltd., agrees the BOJ could, potentially, sit on its holdings for decades.

The BOJ started buying stocks via ETFs more than six years ago as a catalyst to spur trading and promote “more risk-taking activity in the overall economy.” Kuroda tripled the annual purchase target in 2014 and then doubled it to 6 trillion yen last year.

Almost all economists surveyed by Bloomberg no longer expect the central bank to add to stimulus during Kuroda’s term. Instead, they’re looking at when the BOJ will reduce and eventually halt its asset purchases. That said, they see little chance the bank will reach its 2 percent inflation goal -- the grand objective of Kuroda’s program -- anytime soon.

The bank could stop buying ETFs even before price gains reach that level, according to Tasker. Still, that doesn’t mean it will sell the ones it already owns, he says.

“I don’t think they ever need to exit,” the 61-year-old said in an interview last month. “There’s no hurry for them to exit in a sense of selling the equities. But they could stop buying at any time.”

Distort Prices

Views like Matturri’s and Tasker’s contrast with the more common hand-wringing over the BOJ’s presence in local equities. Some say it has the potential to distort prices and trading. Realized volatility of the benchmark Topix index is suppressed by 1 percentage point by the BOJ’s ETF purchases, according to Bank of America Corp.

The BOJ’s ownership of much of the free float at some stocks could make them harder to trade. The bank’s choice of ETFs has left it with much bigger slices of some companies. It holds about 13 percent of Fast Retailing Co., for example, calculations by Bloomberg show, because of the clothing chain’s outsize weighting in the Nikkei 225 Stock Average. It owned almost half the company’s free float as of the end of March, according to Nomura Holdings Inc.

Others criticize the purchases because of a perceived negative impact on corporate governance. The BOJ, they argue, will be a passive owner that doesn’t hold management accountable, which goes against Japan’s moves under Prime Minister Shinzo Abe to get away from a culture of hands-off shareholders.

Reduce Positions

Japan’s main opposition party has said the bank must reduce its positions if it wants to preserve the ability to one day unwind them all. But despite the BOJ’s dominant ownership of Japanese ETFs, the holdings looks smaller as a proportion of the market: they account for less than 3 percent.

Speaking in parliament earlier this month, Kuroda said the purchases aren’t distorting the price mechanism. It’s a view that’s been echoed by Akira Kiyota, who runs the nation’s stock exchange. The bank’s exit strategy will vary depending on economic and market conditions, and any premature discussion of it would cause confusion, Kuroda also said.

Matturri points to Hong Kong as one example of how the BOJ could eventually unwind its holdings. At the height of the Asian financial crisis in 1998, the region bought about $15 billion of Hong Kong-listed shares. It later pooled the holdings into an ETF-like security and disposed of it through a listing on the secondary market.

Despite that option being available, Tasker doesn’t expect an exit anytime soon.

“If there was some kind of inflation scare or bubble scare in Japan, then I suppose they might sell them, but we’re a long way from that,” Tasker said.

— With assistance by Yuji Nakamura

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