The Bank of Japan has, over 14 years, acquired exchange-traded funds containing stocks equivalent to about 7 per cent of listed Japanese firms. In March, BOJ governor Kazuo Ueda called time on this aspect of the central bank’s extraordinary monetary easing programme. The bank has yet to announce what it will do with its half-a-trillion-dollar stock portfolio.
But with about a quarter of stock market gains during the Abenomics period connected to their stock buying, a poorly managed exit could sink the Japanese equity market. It could also undermine the BoJ’s inflation objective.
Why exit at all? After all, in a world of gaping losses from quantitative easing programmes by central banks to support economies, the BoJ’s ETF portfolio has delivered a rare profit. The ¥37tn of cumulative stock purchases have ballooned in value to be worth an estimated ¥77tn today, according to some estimates. Criticism that individual stock prices were being distorted has largely faded since the BoJ reduced the cost of stock-borrowing. And, as Naohiko Baba, head of Japan research at Barclays, notes, the roughly ¥1.2tn in dividends that they bring come in handy. It’s enough to defray the cost of policy normalisation of its monetary policy, offsetting the cost of interest on reserves held at the bank on a policy rate up to at least 0.25 per cent.