The Bank of Japan’s decision to unwind its massive exchange-traded fund (ETF) holdings stunned financial markets and experts alike as its house cleaning may well stretch into the next century.
As the central bank begins to tackle the aftermath of its unprecedented monetary easing, it became clear that at least 100 years may be needed to resolve the consequences of the longstanding policy.
The prospect sparked deep skepticism as financial specialists questioned whether such an unconventional strategy had even a remote chance of succeeding.
MARKET SHOCK
Financial markets were blindsided by the BOJ’s announcement on Sept. 19 that it would begin selling off the ETFs it had purchased in vast quantities.
This move marks the start of unwinding extraordinary monetary easing, commonly termed “forbidden” policy. The sheer scale of the task is daunting: at the current pace, it will take more than a century to complete.
The market was exceptionally buoyant after the Nikkei average hit a record intraday high of 45,852.75 yen in the morning. But just before 1 p.m., when the BOJ revealed its new policy, the mood shifted. Fears over ETF sales triggered a sharp drop, and by 1:19 p.m., the index had fallen more than 1,300 yen from its peak.
LEADERSHIP’S STANCE
The BOJ’s governor, Kazuo Ueda, had previously avoided specifying a timeline or pace for ETF sales by repeatedly stating the bank would take its time.
But at the Sept. 19 news conference, Ueda explained, “Given the nature of the matter, it was difficult to provide advance guidance.”
It appears the BOJ feared that even hinting at sales could cause a massive market plunge.
Still, there were hints of change. BOJ Deputy Governor Ryozo Himino, in a speech in Hokkaido on Sept. 2, said the bank would “draw on lessons learned from past stock sales,” notably omitting the usual “take our time” phrase.
Another BOJ official admitted: “It’s unnatural for the central bank to hold ETFs. We’ll quietly sell small amounts over a long period to avoid market disruption.”
EXIT PRIORITIES
The BOJ’s priorities in this decision were threefold: selling at a fair price, minimizing losses and avoiding market turmoil.
The model was the central bank’s own experience of selling stocks bought from financial institutions–a process that took nine years and ended in July, with sales accounting for just 0.05 percent of total market turnover. The BOJ plans to keep ETF and J-REIT (Japan Real Estate Investment Trust) sales at a similar proportion.
Was the record-breaking stock market a factor? Ueda denied it was so, saying, “We did not make the decision based on specific stock price levels.”
POLICY LEGACY
Massive ETF purchases began under former Governor Haruhiko Kuroda as part of the BOJ’s extraordinary monetary easing policy. The aim was to raise investor confidence and lift Japan’s economy and prices.
As a monetary policy, buying ETFs was highly unusual. Some called it a “forbidden move.” Even so, Ueda defended the purchases as “necessary as part of large-scale easing.”
But the road to an exit is awesome.
The BOJ holds over 37 trillion yen in ETFs at book value. At the current pace, it would take until around 2138–112 years from now–to finish selling.
Ueda acknowledged, “I won’t be around to see the end … it’s hard to judge the overall outcome.”
CRITICS SPEAK OUT
Since March last year, the BOJ has shifted from extraordinary monetary easing, raising rates three times and reducing government bond purchases.
Yet, selling the ETF holdings remains an enormous challenge, and doubts persist about the feasibility of the BOJ’s approach.
Takahide Kiuchi, a former BOJ Policy Board member who is now with Nomura Research Institute Ltd., commented: “This seems to be more about creating a record of having started normalization. It does not represent a true exit from large-scale monetary easing.”
Given the timeline for completing the sales, Kiuchi said, “It is not realistic.”
The BOJ’s ETF purchases began in 2013 and ballooned under Kuroda. The bank’s holdings had a book value of about 37 trillion yen as of Sept. 19 and a market value of 85 trillion yen.
When he served on the Policy Board, Kiuchi opposed expanding ETF purchases.
“The costs and benefits did not match,” he said. “It should not have been done.”
LINGERING PROBLEMS
The problems had been pointed out for years. Unlike government bonds, ETFs have no maturity and won’t shrink unless sold. Selling slowly to avoid market upsets takes time, and falling stock prices could worsen the BOJ’s finances. There is also persistent criticism of central bank intervention in the stock market.
Shingo Ide of NLI Research Institute noted that the bank put off the issue for years, so the decision to sell at least represents a step forward.
“Still, they’ve done something so serious that it will take over 100 years to clean up.”
Some believe the BOJ may consider other methods to divest.
Koichi Kurose of Resona Asset Management Co. suggested: “They’ll start with small sales and gradually increase. The market could absorb 1-2 trillion yen a year, so it might be possible to finish in a few decades.”
Ide added, “The most likely scenario is for a government financial institution to buy the ETFs from the BOJ,” separating them from the central bank’s balance sheet.
(This article was written by Kuniaki Nishio, Eisuke Eguchi and Chihaya Inagaki.)