The former Governor of the Bank of Japan who tried small-scale purchases in 2010 may not have thought at the time that the Bank of Japan would have turned the ETFs in its hands into a "giant whale" in 2022 and might not be able to get rid of it.
The Bank of Japan now holds 80% of the country’s ETFs, equivalent to 7% of its $6 trillion stock market value. The Bank of Japan attempts to stimulate economic development through large-scale stock purchases, and other central banks can only fall behind in this regard. In addition, the Bank of Japan’s net bond purchases reached US$3.7 trillion, leading other central banks.
From small-scale experiment to over-reliance
Initially, the Bank of Japan’s plan to buy ETFs was only a small part of the overall policy of large-scale bond purchases. For decades, the Bank of Japan has tried every means to fight deflation in the hope that prices will rise steadily.
In 2010, the former president conducted a small-scale stock fund purchase experiment. Beginning in 2013, when Kuroda Haruhiko began to serve as the governor of the Bank of Japan, the Bank of Japan increased the scale of purchases.
"The Bank of Japan must show that it is taking bold action and therefore needs to step up purchases in 2013 as well," said Sayuri Shirai, a former BOJ board member. The initial effect of
is obvious. In 2013, the Topix gained 51%, its third-highest gain on record, while the Nikkei 225 posted its strongest annual performance since 1972. Prices began to rise, and with a temporary boost from a sales tax increase, inflation even exceeded 3%.
But this effect was not sustained as asset purchases continued. After oil prices collapsed in late 2015, Japan's inflation rate returned to zero.
Measures such as the introduction of negative interest rates not only failed to stimulate the economy, but instead hit bank stocks, the stock market plummeted, and the yen strengthened.
In 2020, Haruhiko Kuroda made a desperate move to double the size of ETFs to 6 trillion yen per year. gave the stock market a shot in the arm .
According to Wall Street Insights previously compiled, the situation in 2020 is that as soon as the Topix index falls by 0.5%, the central bank will buy ETFs to intervene in the market.
As the outbreak disrupted the economy, the Bank of Japan stepped up spending, buying large amounts of bonds and boosting ETF purchases by 165% in March 2020 from the previous month. The Bank of Japan also set an annual purchase cap at 12 trillion yen, double its annual target of 6 trillion yen.
In 2021, the Bank of Japan announced the cancellation of the annual ETF purchase target of 6 trillion yen in an attempt to downplay the market's dependence on liquidity.
But seeing the malnutrition of the Japanese stock market, Kuroda Haruhiko couldn't help but "milk the baby."
According to previous compilation by Wall Street News, in 2021, when the Topix Index falls by about 1%, approximately 50 billion yen of ETFs will be purchased; when the Topix Index falls by more than 2%, the total number of ETF purchases will reach approximately 70 billion yen. .
Soon the Bank of Japan overtook the Government Pension Investment Fund, the world's largest pension fund (valued at $1.6 trillion), to become Japan's largest shareholder.
In 2021, the Nikkei 225 index once soared to more than 30,000 points, the first time in more than 30 years.
Through continuous buying and buying, the Bank of Japan eventually accumulated 80% of the country's ETFs, which also expanded the size of the Japanese ETF market to US$500 billion.
Rebecca Sin, an ETF analyst at Bloomberg , said Japan’s ETF market has become “very dependent on the Bank of Japan” . She also said the market has also become "very fragmented" as companies tend to issue new products to comply with the Bank of Japan's buying guidelines.
At its March 2021 meeting, the Bank of Japan stated that large-scale purchases of ETFs were effective in stabilizing the market when needed, but did not mention their impact on inflation.
In March this year, after the Federal Reserve announced the first interest rate increase since 2018, Kuroda Haruhiko announced that it would continue to implement the loose monetary plan.
In addition, The Bank of Japan purchased another 70.1 billion yen in ETFs on Thursday, and the Nikkei 225 Index and Topix Index both fell 2% in early trading.
But amid continued purchases of ETFs, the Bank of Japan’s 2% inflation target remains out of reach.
According to a 2019 study by the National Bureau of Economic Research, buying ETFs “has a limited ability to stimulate aggregate demand.” The researchers concluded that companies do issue more shares when stock prices rise, but they mostly hoard the proceeds rather than spending them on projects that stimulate demand. It is far from clear whether the experimental ETF project
will succeed. Some economists point out that a perfect set of circumstances is needed: Acquisitions must push up stock prices, prompting companies to raise capital by issuing more stock and then investing the proceeds in projects that boost demand, ultimately pushing up prices. How to exit
? What are the consequences of quitting?
In fact, the Bank of Japan suspended its ETF purchase plan as early as mid-2021, which was also the first step in its gradual stop intervening in the economy in this way.
Suspending purchases is one thing, but how to deal with the ETF assets on hand, which accounts for 80% of the country, is another.
According to Bloomberg insiders, the Bank of Japan has not formally discussed an exit strategy.
But selling assets has precedent in Japan.
The Bank of Japan sold commercial bank shares it bought more than 20 years ago to support private banks during the domestic banking crisis.
JPMorgan analysts estimate that if the Bank of Japan dumped ETFs at the same pace to avoid disrupting the market, it would take 150 years to clear out its ETF holdings.
"They can't sell now, otherwise the stock will definitely fall" , Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co., said "The negative impact will be very huge."
Bloomberg quoted people familiar with the matter as saying that just holding it might be possible in the future. Worthless stock funds also pose risks to the Bank of Japan's financial position. This is another reason why central banks, such as the Swiss National Bank, avoid buying stocks without a commitment to manage national reserves, and the Fed does not have the power to do so.
The Bank of Japan has been keeping a low profile on its plan to exit ETF purchases. Haruhiko Kuroda is preparing to resign in 2023, but he has been tight-lipped about the exit plan; the tricky task of how to sell off the Bank of Japan's positions without triggering a massive sell-off in the stock market will now be fell on his successor.
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