On April 15, in the “Economic Survey “Japan”” released by the OECD, they expressed their concern toward the purchasing of ETF (Exchange-Traded Fund) by the Bank of Japan, stating that this action is potentially “damaging the market discipline”. In response to this, the Governor of the Bank of Japan, Haruhiko Kuroda, said that this “is part of a strategy to accomplish the price stability target of 2%”, and “is playing a big part toward achieving said target”.
On April 16, when asked about the issue again during the Financial Affairs Committee Meeting, Kuroda responded by saying “although I understand that there are different voices regarding this issue, it’s a necessary and important step for “stock market stability”, then quickly corrected himself, “price stability, not stock market stability”.

Dating back to January of 2013, it was at the Monetary Policy Meeting that the Bank of Japan decided on the “Price Stability Target of 2%” in terms of the “year-to-year rate of change in the CPI”.  However, as of April 2019, achieving that goal is still that of a distant dream. Amidst the concerns of the decrease in expectations toward Quantitative and Qualitative Monetary Easing (QQE), perhaps Kuroda’s “stock market stability” remark was in reaction to the mention of possible “negative side effects” as the stock market stability is an evidently achievable target. Of course, his comment was immediately corrected, but given the reality that achieving the “Price Stability Target” cannot be seen at this point, the concern toward the market deformation and negative side effects may be growing within Kuroda.

For 2018, the purchasing of ETF by the Bank of Japan reached 6.504 trillion yen. In December of the same year, their ETF holdings were 23.5497 trillion yen, accounting for about 4% of the total market capitalization (stocks) of the companies listed in the first section of the Tokyo Stock Exchange. This amount continued to increase into the new year, and by the end of March, could have exceeded 28 trillion yen. As numerously explained by Kuroda, the objective for the purchasing of ETF by the Bank of Japan is for price stability, not stock market operations through market interventions, nor for net investment. Therefore, they cannot sell the ETF until this target is met, and therefore is leading to a dent in the stock market, which in actuality should accurately reflect corporate value.

However, this is not the only issue. In the worst case scenario, should the market price experience a sharp drop and its current value falls below the acquisition value, the Bank of Japan will end up holding a large latent loss. In other words, there’s a possibility that the trust of the Japanese Yen itself may be damaged. And to avoid this risk, there is a need to decrease the remaining ETF holdings. However, there is a fear and risk that selling the ETF may entice a drop in the market price, meaning that the Bank of Japan is in a situation of no return, of no turning back.
Even if this is the case, the Bank of Japan is preparing an effective exit strategy, and is entering the period of expressing its will to decide on a policy under certain circumstances. This should mean that it will be effective in the sense of increasing “the number of hands” as a financial policy as well.

Takashi Mizukoshi, the President