In a significant move that echoes the complexities of the Japanese financial landscape, the Bank of Japan (BoJ) is gearing up for an early exit from its holdings of hundreds of millions of dollars worth of stocks it acquired during the tumultuous financial crisis two decades ago. This imminent decision casts a spotlight on the fate of the BoJ's substantial exchange-traded fund (ETF) assets, an issue that is now drawing keen attention from various financial sectors and investors alike.
As of February 10, the BoJ’s latest account data shows that the book value of the stocks purchased by the bank reached an impressive 52.8 billion yen (approximately $345 million). The BoJ has been selling off assets at a steady pace of around 10 billion yen per month over recent years, suggesting that it could dispose of all remaining assets within a span of about five months. The central bank, back in 2015, indicated its intent to wrap up this stock reduction by March 2026, marking a timeline that resonates with both caution and strategic planning.
For investors, this is a pivotal juncture. A spectrum of observers analyzing the Bank of Japan's actions have posited that, due to those concerns regarding possible market turbulence, it is improbable that the BoJ will simultaneously offload both bank stocks and ETF holdings. With the impending completion of the sale of bank stocks, speculation arises that the BoJ may begin discussions with market participants about its intentions regarding ETF assets as early as this year, a step many anticipate as a crucial communication strategy.
The management of ETFs represents the final piece of the policy puzzle for Bank of Japan Governor Kazuo Ueda. While he has systematically sought to unwind the ultra-loose monetary policies of his predecessor, Ueda's stance on ETFs remains relatively ambiguous. This is particularly evident as he continues to raise interest rates and contemplate the cessation of yield curve control without specifying any concrete plans concerning ETFs.
In the past year alone, Ueda has raised rates on three separate occasions and has rolled out a plan for quantitative tightening by selling massive quantities of government bonds. Recently, he reiterated his long-held position that he requires additional time to evaluate the fate of ETFs - an acknowledgment of the intricate nature of the issue at hand.
Per recent account data, the BoJ holds a staggering approximately 370 trillion yen (around $2.42 trillion) in ETFs. Based on market value, a report from the BoJ pegged that figure at 703 trillion yen as of the end of September. Notably, since September, the Nikkei 225 index has surged by 3.3%, which is nearly four times the level when the BoJ initiated its ETF purchase program. This growth in the market not only reflects the performance of the underlying assets but also illustrates the profound impact that the BoJ’s monetary policies have had on Japan’s financial system.
The BoJ embarked on its journey into equity funds in December 2010, embedding this action within a broader monetary stimulus initiative aimed at tackling low inflation. Under the stewardship of former governor Haruhiko Kuroda, the scope of asset purchases expanded significantly. It wasn't until Ueda officially halted this program in March of last year that the BoJ emerged as the most prominent single shareholder in Japanese equities.
In stark contrast to its ETF acquisition scale, the volume of bank stock purchases was approximately fifteen times lesser than that of ETFs. The BoJ commenced its purchases of bank stocks in November 2002, maintaining this strategy for about two years, targeting the remediation of some severe bad debt problems faced by banks to bolster financial system stability. In the wake of the global financial crisis, the bank resumed buying activities between February 2009 and April 2010.
Despite their relative insignificance compared to the BoJ's ETF holdings, the divestment of bank stocks has been a long, deliberative process. The BoJ's initial attempt to sell bank stocks began in October 2007 but was interrupted a year later by the onset of the global crisis. In a turn of strategy articulated at the end of 2015, the BoJ announced a resumption of sales, extending the timeline over ten years. This prolonged period underscores the cautious approach the bank has undertaken as it navigates a transition towards normalcy.
The future of the ETFs held by the Bank of Japan has become a focal point for some lawmakers, especially as the nation grapples with an expanding fiscal budget despite accumulating the largest public debt burden among developed countries. This juxtaposition of monetary strategy and fiscal policy elicits discussions about Japan’s economic resilience.
Analysts have suggested that one potential strategy for managing the sale of these assets could mirror the actions taken by Hong Kong in 1998 following stock market intervention. At that time, Hong Kong consolidated its shareholdings into a newly listed vehicle to streamline exits. Similarly, Japan could contemplate the establishment of a separate entity that would judiciously market these assets at an opportune moment, or alternatively, consider divesting these holdings directly to long-term institutional investors.
Despite the escalating interest from the market regarding the ETF situation, it appears that the Bank of Japan has scant pressure to expedite the liquidation of its stock fund assets. During the fiscal year ending in March 2024, the bank raked in an impressive 1.2 trillion yen in income from ETF dividends. As the costs associated with interest payments to banks are expected to escalate in synchronization with the normalization of interest rates, such income is set to continue providing substantial support to the BoJ’s financial health.
Since 2021, the Bank of Japan has sold bank stocks at an average pace of 11.1 billion yen per month. Should the BoJ apply that same methodology to its ETF assets, the process could theoretical stretch on for an astonishing 279 years. This figure starkly illustrates the intricate challenges and the long-term considerations that underlie the central bank's potential decision-making regarding its ETF holdings amidst a complex economic environment.