When the chief of a country's biggest stock exchange is warning that the central bank is buying too many equities, then you know you have a problem. Japan Exchange Group Inc. Chief Executive Officer Akira Kiyota has become the latest member of Japan’s financial establishment to publicly criticize the BOJ for its longrunning ETF buying program, according to Bloomberg.
To the litany of reasons why the program is bad for markets, the two most obvious biggest being that the bank is artificially inflating valuations while hurting efforts to make public companies more efficient, Kiyota, whose company operates the Tokyo Stock Exchange, the country's biggest, has added one more: That the central bank’s buying artificially suppresses volatility, which makes traders less willing to trade.
“It’s not good in the long run,” Kiyota said in an interview in Tokyo last week. “If you keep buying 6 trillion yen a year, that means constant distortion.”
He later said that “The BOJ buying ETFs during the market’s infancy is welcome." But “ETFs need to be able to grow as a market by themselves, without the BOJ’s help.”
As recently as September, Kiyota said he saw no problem with the ETF buys, believing that the Japanese equity market’s capitalization of around 500 trillion yen would be too large for the central bank’s purchases to distort the market and that, even if they did, the central bank would find a way to handle it. But then he took a closer look at trading volumes on the exchange.
“A gauge tracking volatility on the Nikkei 225 has been hovering near 12-year lows, hitting the least since July 2005 on Friday. Kiyota points to how the value of shares changing hands on the first section of the Tokyo Stock Exchange fell below 2 trillion yen on some days last quarter, even as he acknowledged the BOJ buying “supports” stock prices.
“The stock index levels themselves might be good, but Japan’s cash market isn’t really active,” Kiyota said. “When volatility decreases, trading volume also shrinks.”
As Bloomberg explains, Kiyota’s outburst is notable not just for his criticisms but for the fact that he chose to spoke out. Members of Japan’s financial establishment rarely criticize other parts of the establishment, and it could be a sign that public opinion is turning against BOJ Gov. Haruhiko Kuroa’s QQE efforts. Bloomberg recently reported that some inside the BOJ were said to be concerned about the program’s sustainability.
Through its ETF-buying program, which began in 2010, the BOJ has become the single largest whale operating in the country’s equity market. Last July, the central bank opted to double the size of the program to 6 trillion yen (or $54 billion) from 3 trillion yen. As of the end of June, the BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June, according to a Bloomberg analysis of data from the central bank and Japan’s Investment Trusts Association. That’s equivalent to about 2.5 percent of Japanese stock market capitalization. By the end of this year, the central bank will have become the top shareholder in 55 of the companies included in Japan’s main stock index, the Nikkei 225.
Furthermore, the Financial Times recently presented evidence of the BOJ’s willingness to step in and buy the dips – the exact practice that Kiyota is criticizing – by showing that the central bank stepped in on half of the market’s down days between 2013 and 2017. Of the 1,038 business days between April 2013 and March 2017, there were 449 sessions where the market was down: the BOJ bought during more than half of them.
While the BOJ doesn’t buy individual shares directly, it’s the ultimate owner of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan.
Last week, the BOJ kept monetary policy, including the ETF program, unchanged after the close of its two-day policy meeting, as was widely expected.
Critics complain that the BOJ purchases are giving a free ride to poorly-run firms and crowding out shareholders who would otherwise push for better corporate governance. But a far more substantial question is often ignored: Just how will the BOJ ever unwind its unprecedented holdings of not only bonds, which are now roughly 100% of Japan's GDP, but also of stocks, without crashing both markets?