BOJ Nearing End of Bank Stock Sales: Shifts Focus to ETF Assets

The Bank of Japan (BOJ) is nearing the end of its bank stock sales, marking a significant shift in its monetary policy. The central bank, which has been a major player in the Japanese stock market, is now focusing its attention on exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). This shift comes as the BOJ decides to discontinue its purchases of these assets, which have been a key component of its large-scale asset purchases (LSAP) program.

The BOJ's policy of purchasing ETFs and J-REITs has had a profound impact on the Japanese stock market. The central bank's policy was unprecedented in the world, with the BOJ assuming risk by purchasing these assets. While some critics argue that this policy has caused distortions in the market, others point out that it has contributed to the Japanese stock rally in terms of supply and demand.

The BOJ's policy of purchasing ETFs and J-REITs has had a specific pattern of regularity. When the Tokyo Stock Price Index (TOPIX) fell to a certain level in the morning, the BOJ would buy ETFs in the afternoon. This regularity has been referred to as the "2% rule" recently, where the BOJ tended to buy ETFs in the afternoon if TOPIX fell by 2% in the morning. However, on the morning of March 11, even though the TOPIX fell by more than 2%, the BOJ did not buy ETFs, increasing speculation that the BOJ would modify its policy.

The BOJ's unorthodox policy of purchasing ETFs has both pros and cons. One negative is the side effect of distorting stock price formation and market functioning. Another point of criticism is that the BOJ's continued purchases have indirectly increased its holdings of certain stocks. On the other hand, Masamichi Adachi, chief Japan economist for UBS, expressed his view saying, "We need to consider what Japan would have been like without the BOJ’s ETF purchases. It was positive that the BOJ took as many easing measures as possible."

As the BOJ discontinues its purchases of ETFs and J-REITs, the focus will now shift to measures to utilize the ETFs purchased by the BOJ as well as exit strategies. There have been discussions in the market about the distribution of ETFs to the public. Overseas, the Hong Kong government purchased stocks in response to the Asian currency crisis. As an exit strategy, the government formed ETFs and transferred them to individuals and others at discounted prices. Some consider that this has helped foster individual investors. Shigeki Kushida, the BOJ’s ex-executive director under Governor Haruhiko Kuroda until 2017, contributed an article to the Securities Analysts Journal in 2017 on a Hong Kong-inspired exit plan, which attracted interest as one of the options. However, there are currently many objections to a Hong Kong-style exit plan. One of the reasons is the cost required for the plan. Japan is moving on the path toward asset building under the slogan “from savings to investment.” However, many of the Japanese citizens still do not have securities accounts. There is concern that a Hong Kong-inspired exit plan will require enormous time and money to open accounts for all citizens, determine the allocation method, and process administrative tasks. In addition, some say that the financial literacy of the Japanese people is still in its infancy and that they are likely to sell the distributed ETFs immediately. Shingo Ide, chief equity strategist at NLI Research Institute, proposes that “it would be a great idea to use a method similar to a sovereign wealth fund utilizing the BOJ-owned ETFs.” One example, he says, is modeled after a “university fund” format that has started in Japan in recent years. Mr. Ide’s proposal is as follows. First, ETFs would be transferred to government-affiliated financial institutions, etc., to be converted into funds and exchanged for cash stocks so as not to adversely affect the supply-demand balance of stocks. Then, the voting rights policy would be presented. Finally, dialogue with companies and the exercise of voting rights would be conducted to promote corporate growth and governance, boosting the Japanese economy. Dividend income, for example, would be used to raise children and develop human resources. The challenge with this proposal lies in the financial resources. Even if fiscal investment and loan programs (FILP) are used as the source of funds, as in the case of university funds, the fund size would be too large. Mr. Ide advocates transferring JPY10 tn each time, rather than the entire amount at one time. However, “There are many things that need to be agreed upon, such as FILP repayment plans,” he

As the BOJ shifts its focus from bank stocks to ETF assets, investors and market participants will be watching closely to see how this change in policy affects the Japanese stock market. The BOJ's unorthodox policy of purchasing ETFs has had both positive and negative implications for the market, and its exit from this policy will likely have significant consequences as well. The BOJ's decision to discontinue its purchases of ETFs and J-REITs marks a new chapter in the central bank's monetary policy, and the market will need to adapt to this change in order to navigate the challenges and opportunities that lie ahead.