July 6, 2017
<BOJ’s ETF Purchases >BOJ's ETF Purchases Expanding Steadily— How long will the BOJ hold risky assets with no maturity?
Ikuko FUEDA-SAMIKAWA (Principal Economist)1
Tetsuaki TAKANO (Economist)2

The Bank of Japan has recently announced that its total assets, including Japanese government
bonds (hereinafter referred to as “JGBs”) and exchange-traded funds (hereinafter referred to as“ETFs”), exceeded 500 trillion yen at the end of May for the first time. This amount is now
comparable to Japan’s nominal Gross Domestic Product (GDP), and the ratio is far higher than thoseof other major central banks. Under the current “inflation-overshooting commitment,” the BOJ isexpected to expand the monetary base until the year-on-year rate of increase in the observed consumer
price index (CPI) exceeds the price stability target of two percent and remains above the target in astable manner, but it still appears to take time to reach the goal. Will the Bank face a purchasing limit
or any risk in expanding its balance sheet? Following the May 23 report on the BOJ’s purchases ofJGBs, the Bank’s holdings of ETFs will be considered in this report. What are the implications of thecentral bank’s holdings of ETFs? Since maturity or redemption does not come to ETFs, their credit
risk and price fluctuation risk appear to be relatively high. Is there any risk of the BOJ facing
difficulty in the process of “monetary normalization,” i.e. the exit from the current unconventionalmonetary policy?
Unlike JGBs, the Pace of Increase in BOJ’s Holdings of ETFs is Expanding Steadily
The BOJ changed its operational target from quantity to interest rate under the current monetarypolicy “Quantitative and Qualitative Monetary Easing with Yield Curve Control” introduced inSeptember 2016. Regarding the purchase of JGBs, although the annual pace of increase in theoutstanding balance of about 80 trillion yen is still treated as the bond-buying pledge, the increasing
amount slowed to about 70 trillion yen in June (Figure 1 - left)3.
In contrast to JGBs, the BOJ is steadily increasing its purchase of ETFs. It has been a year since theBank announced that it would double its purchase amount of ETFs to about 6 trillion yen in July 2016.
The BOJ’s ETF holding is 14.3 trillion yen at the end of June, and the annual amount of increase from1

Principal Economist, Research Director of Financial Research Team (samikawa@jcer.or.jp)
Economist, Lead Researcher of Financial Research Team
3
“Pace of Increase in BOJ’s Holding of JGBs Slowing -Does the purchase limit risk still remain?,” May 23, 2017.
https://www.jcer.or.jp/eng/pdf/170523_report(eng).pdf
2

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Japan Center for Economic Research
Financial Research Team

July 6, 2017

the previous year has now reached 6 trillion yen (Figure 1 - right). According to The Investment Trusts
Association, JAPAN, the ETF market size (total net asset value) was 24,082 billion yen as of the endof May. The Bank already holds 60% of the market.
Fig. 1 BOJ’s Holdings of JGBs and ETFs (Increase from Previous Year)
85(Trillion yen)
BOJ's JGBs Holdings (Change from previous year)

BOJ's ETFs Holdings (Change from previous year)

6YCC

80

(Trillion yen)

75YCC

475

3270

1(Monthly)

65
16/01

16/05

16/09

17/01

17/06
17/05

(Monthly)

0
16/01

16/05

16/09

17/01

17/06
17/05

Note: Each red line indicates the BOJ’s guideline for the annual pace of increase in the amount outstanding of its JGB
and ETF holdings, respectively.
Source: Bank of Japan

In addition to JGBs, the BOJ is the biggest buyer of ETFs. Looking at the net buying and selling ofETFs by investment sector, the BOJ’s purchase amount far exceeds those of other entities (Figure 2).
In September 2016, when the BOJ’s purchase amount was the largest, it hit a record high of over 800
billion yen. Along with the rise in the Bank’s ETF holdings, its influence on price formation is
expected to increase. It has been pointed out recently that given the BOJ’s purchases, stock price falls
are becoming less likely, and that the market appears to be government-oriented.
Fig. 2 ETF Trading by Investment Sector
6.0

Buying(Trillion yen)

1.0

5.0

0.8

4.0

0.6

3.0

0.4

2.0

0.2

1.0

0.0

0.0

-0.2

-1.0
Selling -2.0

(Trillion yen)

(FY)2011 2012
Individuals

2013 2014
Foreigners

2015
BOJ-0.4

16/04
16/07
16/10
2016
Financial and Securities Institutions(Monthly)
17/01
17/04 17/06
Other CompaniesNote: 1. Data for June 2017 is only for the Bank of Japan.
2. Data excludes ETFs that support firms proactively investing in physical and human capita.
Source: Tokyo Stock Exchange, Bank of Japan

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Japan Center for Economic Research
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July 6, 2017

Bank of Japan Governor Haruhiko Kuroda said at a press conference held on June 16 after themonetary policy meeting that ETF purchase is “a policy that is necessary for realizing the 2% target ofprice stability as soon as possible” and that “we are not implementing it to realize such a level withspecific stock price levels in mind.” However, when plotting the trends of the stock price and theyen-dollar exchange rate, the divergence between the two has expanded since July 2016 when the ETF
purchase amount was raised. Even when the Japanese yen appreciated against the US dollar, the priceof the Nikkei 225 Stock Average often rose (Figure 3). The market capitalization of the First Sectionof the Tokyo Stock Exchange was 593 trillion yen at the end of June, which is now 110 percent ofJapan’s nominal GDP. But even in the huge market, the influence of the BOJ is gradually increasing.
Fig. 3 Changes in Nikkei 225 Stock Average and Yen-Dollar Exchange Rate
21,000(yen)Nikkei225

19,000yen/dollar (RHS)

17,00015,00013,000(Yen/Dollar)

13/04 QQE
1 trillion yen(annual pace)

130
120
110

10/10 Comprehensive Easing
450 billion yen (Original plan)100

11,00014/10 Expansion of the QQE
3 trillion yen (annual pace)

9,000
7,000
11/01

12/01

140

13/01

14/01

15/01

16/07 Enhancement of90
Monetary Easing
6 trillion yen (annual pace)
80(Daily)70
16/01
17/01 17/07

Note: 1. The labels on the graph show the amounts of the BOJ’s purchases of ETFs and decision timing.
2. Data is until July 5, 2017.
Source: Bank of Japan, Statement on Monetary Policy, NEEDS-FinancialQUEST

The amount of BOJ’s purchase of ETFs has been stable at around 70 billion yen per business day(bar graph in Figure 4). Looking at the purchase frequency, however, while the BOJ continues to buy
ETFs for several days during the phase of stock price decline, it tends to stop buying when the stock
price rises sharply. While the purchase of ETFs by the central bank appears to prevent Japanese stock
prices from falling, it could take up opportunities for arbitrage trading from market participants, andthis may impair market function or the soundness of Japan’s stock market.

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July 6, 2017

Fig. 4 BOJ’s ETF Purchases and the Nikkei 225 Stock Average
21,000(yen)The amount of BOJ's purcahse of ETF(RHS)(Billion yen)

Nikkei225

80

20,00070

19,00060

18,00050

17,00040

16,00030(Daily)

15,000
16/07

16/08

16/09

16/10

16/11

16/12

17/01

17/02

17/03

17/04

17/05

17/07
17/06

20

Note: 1. Data excludes ETFs that support firms proactively investing in physical and human capita.
2. Data is until July 5, 2017.
Source: Bank of Japan, NEEDS-FinancialQUESTIs BOJ’s ETF Purchase Necessary to Attain the 2% Target?
What does the situation mean where the stock prices are becoming less likely to fall due to theBOJ’s purchase? Let us look at how the BOJ began to purchase ETFs. The history dates back to theterm of office of the former BOJ Governor Masaaki Shirakawa. In October 2010, the BOJ announced
the “Comprehensive Monetary Easing” and started to buy financial assets such as commercial papers,
corporate bonds, ETFs and investment equities issued by real estate investment corporations(hereinafter referred to as “J-REITs”). In order to encourage the reduction of the risk premium, thepolicy whereby the central bank incurs the credit risk on its own and purchases risky assets such as
ETFs was said to be extremely unusual at that time. The risk premium is the discount price based on
the risk, or to put it in another way, the excess rate of return to compensate for the risk. When future
uncertainty becomes low, investors can invest their money in stocks, and companies can raise more
funds by issuing smaller numbers of stocks.
In April 2013, the BOJ introduced the “Quantitative and Qualitative Monetary Easing” (QQE)
under the new regime of Governor Kuroda, and announced that it would double the amount of ETFs
to purchase. “The purchases of JGBs, ETFs, and J-REITs will encourage a further decline inlonger-term interest rates and lower risk premia of asset prices. This will increase firms’ credit
demand through a decline in funding costs.” The purchase amount of ETFs was tripled to 3 trillion
yen per year with the additional easing in October 2014. This time again, the keyword was “riskpremium.”
The BOJ further doubled the ETF purchase amount in July 2016, to 6 trillion yen per year. At thepress conference, Governor Kuroda was asked by reporters why there was no further cut in thenegative rate or additional quantitative easing by raising the target amount of the monetary base. Hereplied that the BOJ decided to double the pace of ETF purchases because, “Due to the Brexit issue in

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Japan Center for Economic ResearchFinancial Research TeamJuly 6, 2017

the UK and the slowing of emerging economies, uncertainty in overseas economies is rising andglobal financial market instability continues. The BOJ intends to prevent such uncertainty fromcausing a deterioration in the confidence of companies and households.”
The current purchase amount of ETFs is 6 trillion yen annually, which is six times larger than it wasat the beginning of QQE. The Nikkei 225 recently recovered to the 20,000-yen range, anduncertainties have now lessened compared with a year ago. But there are queries about whether it isnecessary for the central bank to continue purchasing ETFs at the current pace. At the press
conference on June 16, however, Governor Kuroda said that the ETF purchases are “from theperspective of working on the risk premium on the stock market” and that “it is a necessary policy forachieving the 2%” target for price stability “as soon as possible,” and showed a cautious approach tothe reduction of the purchase amount.
Regarding the effect of the BOJ’s purchase of ETFs, comprehensive consideration will be given to(1) how much the risk premium was compressed, (2) the extent to which the reduction of the risk
premium brought about the demand for funds by corporations, and (3) whether ETF purchases werereally necessary policy for the BOJ to achieve the 2% price stability as early as possible. As we saw inFigure 3, Japan’s stock price commenced an upward trend at the start of Abenomics and QQE, but thecash and deposit ratio of companies has remained high and the rate of increase in consumer prices has
not reached 2%.
BOJ’s Purchase of ETFs――Affecting Management Decisions of Corporations
As a result of continuing to purchase a large amount of ETFs, the BOJ has become the de facto
largest shareholder in a number of companies already. Since the BOJ purchased ETFs through trustbanks, the Bank does not exercise voting rights at the general meetings of shareholders, but there is apossibility that the BOJ may have influenced a company’s management judgment to a considerable
extent through the decline of the corporate governance function. The presence of the silent and largest
shareholder involves the risk of the survival of so-called “zombie companies.”
Through the purchase of the ETFs, the BOJ already has more than 5% of the outstanding shares in83 corporations. The BOJ’s holding ratio of Fast Retailing shares handling “UNIQLO” alreadyexceeds 15%. The ratio is far higher on a floating share basis. If the number of floating shares
decreases due to the BOJ’s purchase, the market liquidity of individual stocks may decline sharply andincur the price discovery function of individual stocks.
Fiscal Policy? How Long Will the BOJ Continue Purchasing ETFs?
In 2010, when discussing whether to buy ETFs, the BOJ said that monetary policy was approaching
the area of fiscal policy, “The Bank has thoroughly considered a grave issue of to what extent thosepolicies should be pursued based on a central bank's own independent judgment in a democracy.” The

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Japan Center for Economic Research
Financial Research TeamJuly 6, 2017

eventual loss would not only lead to taxpayer burdens, but the central bank would also be deeply
involved in allocating resources to individual companies and industries. It has been more than sixyears since then, and the BOJ’s holdings of ETFs are still increasing rapidly. It seems to be necessary
to consider the effects and risks of the BOJ’s purchase of ETFs once again.
20% Stock Price Fall will blow the BOJ’s Unrealized Profits from ETFs
Figure 5 shows the ETF holding status published in the BOJ’s financial statement for FY2016. Asof the end of March 2017, the BOJ holds ETFs of 13.1 trillion yen. As the term-end market valuation
is 15.9 trillion yen, the Bank currently has unrealized profits. The unrealized profits are estimated atabout 3.6 trillion yen as of the end of June. In addition, the BOJ, by holding ETFs, received
distribution income of 172 billion yen in FY2016, contributing to the Bank’s earnings. However, if theETF price declines significantly in the future, the BOJ will have to make a provision for the losses.
The larger the Bank’s holding amount of ETFs, the higher the provisions the Bank has to set aside. At
this time, if losses related to the holding of JGBs or foreign currency-denominated assets increase, theBOJ’s profits could be significantly shaken. This could damage the Bank’s capital. The BOJ’sordinary profit in FY2016 was 1,095 billion yen, net assets were 3,665 billion yen, and the capitalbase including the provision account was 7,847 billion yen. According to an estimation by the authors,when the stock price falls by 20%, all the unrealized profits arising from the BOJ’s holding ETFs willbe blown off. If the stock price rises, the provisions can be withdrawn, but as the ETF holdings
increase, the BOJ’s profits and losses can be more volatile.
Fig. 5 BOJ’s ETF holding status
End of the month
March 2011
March 2012
March 2013
March 2014
March 2015
March 2016
March 2017
Jun 2017

Puchased
Valuation at
Amount Market Prices
204
202
874
959
1,573
2,123
2,869
3,866
4,572
6,964
7,568
8,766
13,161
15,93014,082
17,664(Billion yen)
Profits andLosses
-2
85
550
997
2,392
1,198
2,769
3,582

Note: 1. Only the figures for June 2017 are estimated values. The estimations are made as follows. We assume that thepurchase prices are allocated proportionally according to the market prices of each stock at the end of the previous
month before the purchase execution date, and are purchased at the closing prices. The number of stocks is 20 at theend of June 2017.
2. We assume that the BOJ does not make direct ETF purchases through the stock exchanges, and that it does notsell any of the ETFs it has purchased.
3. The data do not take into account the differences between each ETF’s operational performance and stock index,dividends and various fees.
Source: Bank of Japan, NEEDS-FinancialQUEST

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July 6, 2017

If the BOJ continues to purchase ETFs at an annual amount of 6 trillion yen, the amountoutstanding will reach 19 trillion yen at the end of March 2018 and 25 trillion yen at the end of March
2019. In the exit, the BOJ will need to face not only the price fluctuation risk but also the risks arisingfrom holding such a massive amount.
ETF Holdings Expose the BOJ to Extensive Risks—Ultimately a National Burden
When Japan was suffering from serious non-performing loan problems, the BOJ purchased
individual shares from private financial institutions. The purchase from November 2002 to September
2004 was to prevent Japan’s entire financial system from malfunctioning. The BOJ bought individual
shares again from February 2009 to April 2010 to avoid the negative impact of the global financial
crisis on the Japanese financial system. The cumulative purchase of individual shares amounted toabout 2.4 trillion yen. Although it was an exceptional measure as a central bank, at that time it wasimplemented as a macro-prudential policy to stabilize the financial system, not as a monetary policy.
In addition, at the policy committee meeting on December 17, 2015, the Bank decided to sell its
individual shares over the following 10 years by the end of March 20264. The BOJ’s holding of ETFs
is significantly higher than individual stocks. If the BOJ announces its intention to sell the ETFs on
the market at the future exit stage, it could shake the stock price to a significant extent, andconsidering the current holding size, the possibility of selling ETFs is likely to continue for a longtime. Meanwhile, the BOJ’s finance will be subject to price fluctuation risk and credit risk. How will
the BOJ handle its ETFs with no maturity? The BOJ’s communication strategy with the market
becomes increasingly important in terms of the problem that could ultimately be a national burden.
The BOJ has issued subscription certificates. Of its 100 million yen capital, 55% is invested by thefinance minister, and the remaining 45% is invested by the private sector. The subscription certificatesare listed on the JASDAQ and traded on the market. Figure 6 shows the BOJ’s stock price, whichsoared at the beginning of QQE in April 2013. Having entered its fifth year of QQE, however, theprice has fallen to the same level as at the end of former Governor Shirakawa’s term. Although
investors are not permitted to exercise voting rights, the BOJ’s stock price may be said to be a kind of“expectation” for its monetary policy.

4

The Bank of Japan to Postpone Completion of Sales of Stocks Purchased from Financial Institutions, Dec. 18, 2015.
https://www.boj.or.jp/en/announcements/release_2015/rel151218b.pdf

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Japan Center for Economic Research
Financial Research TeamJuly 6, 2017Fig. 6 BOJ’s Stock Price Now at the Level Before QQE
80,000(Yen)70,000Stock Price (Bank of Japan)

60,00050,00040,00030,00020,00010,000
0
10/01

11/01

12/01

13/01

14/01

15/01

17/01 17/07

16/01

Note: Data is until July 5, 2017.
Source: NEEDS-FinancialQUEST<Reference>
Fueda-Samikawa, I., and Takano, T. (2017), “Pace of Increase in BOJ’s Holding of JGBs Slowing-Does the purchase limit risk still remain?-,” Japan Financial Research, No. 34.
Kuroda, H. (2013), “Quantitative and Qualitative Monetary Easing -Speech at a Meeting Held by theYomiuri International Economic Society in Tokyo-,” April 12, 2013
Shirakawa, M. (2010), “Japan’s Economy and Monetary Policy -Speech at the Kisaragi-kai Meeting inTokyo-,” November 4, 2010

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