BOJ’s Offloading of Shares to Shift Focus to ETF Holdings

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(Bloomberg) — The Bank of Japan is on course to finish offloading millions of dollars of stocks that it bought from beleaguered banks during the financial crisis two decades ago sooner than scheduled, a development that throws into focus the fate of its considerably larger holdings of exchange-traded funds.

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The book value of share holdings acquired by the BOJ stood at ¥52.8 billion ($345 million) as of Feb. 10, according to the latest BOJ report on its account. Considering the pace of its monthly selling has consistently been about ¥10 billion over the past few years, the central bank could dispose of all the remaining assets in about five months. The bank said in 2015 it would finish selling down these shares by March 2026.

It’s a key consideration for investors. Many BOJ watchers are of the view that authorities wouldn’t likely sell the assets purchased from banks and ETFs simultaneously over concerns of potential market ructions. An early finish to the bank stock operations raises the possibility that the BOJ may telegraph its intention to sell ETFs by kicking off discussions with market participants on the process as early as this year.

The ETFs holdings are the last major piece of Governor Kazuo Ueda’s policy puzzle. As he’s sought to unwind the ultraeasy policy settings undertaken by his predecessor, the governor has refrained from referencing specific plans for ETFs even as he raised interest rates and dismantled the yield-curve control mechanism.

Ueda has raised rates three times over the last 12 months, and has also announced a plan for quantitative tightening through the sale of massive government debt holdings. The chief last month reiterated his long-held position that he needs more time to mull the fate of the ETFs because it’s a complicated issue.

The BOJ holds about ¥37 trillion ($242 billion) of ETFs by book value, according to the latest account data. In terms of market value, these assets were worth ¥70.3 trillion at the end of September, according to a central bank report. Shares on the Nikkei 225 index have risen 3.3% since then and are almost four times higher than when the central bank launched the ETF buying.

The BOJ began to buy the stock funds in December 2010 as part of a monetary stimulus program aimed at stoking inflation. Former Governor Haruhiko Kuroda expanded the asset buying so much that the bank became the biggest single holder of Japanese stocks before his successor Ueda formally ceased the operations in March last year.

Compared with the ETFs, the scale of the purchase of banks’ stock holdings was about 15 times smaller. The BOJ began acquiring those assets in November 2002 and sustained the buying for about two years as it sought to preserve financial system stability by helping banks address their severe bad debt problems. In the wake of the global financial crisis, the bank resumed the buying between February 2009 and April 2010.

While the size of the bank shares is relatively small compared with the BOJ’s ETF holdings, it’s taken the central bank roughly a decade to get this close to shedding all the stocks from its balance sheet. The bank began to initially sell them in October 2007 before suspending sales a year later due to the global financial crisis. At the end of 2015, it said it would resume the sales in April 2016 with an extension of the selling duration to a decade.

The fate of the BOJ’s ETF holdings has already caught the attention of some politicians as the nation expands fiscal spending even as it already shoulders the largest public debt burden among developed nations. The Constitutional Democratic Party of Japan has called for shifting ownership of the assets to the government so they can be used to fund childcare measures.

Some analysts say that one option would be to replicate what Hong Kong did after its stock market intervention in 1998, when it disposed of its holdings by pooling them into a new listed vehicle. Japan could also create an entity to sell into the market at opportune times, or offer the assets to long-term institutional investors off the market, they said.

While interest in the issue is growing, there is little need for the BOJ to rush to dispose of its stock fund assets. The bank earned ¥1.2 trillion in revenue from ETF dividends in the fiscal year ended in March 2024. That flow of funds is expected to continue offering sizable support for the bank’s finances at a time when the cost of paying interest to banks is bound to rise further in tandem with its normalization process.

The average pace of the BOJ’s bank stock selling has been ¥11.1 billion per month since 2021. If the BOJ takes exactly the same approach with its ETF assets, the process would take 279 years.

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