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BOJ tops pension whale as Japan's largest stockholder

Central bank's $440bn ETF trove leaves it exposed to bear market

The Bank of Japan headquarters in Tokyo: The BOJ's holdings of exchange-traded funds continue to swell. (Photo by Tetsuya Kitayama)

TOKYO -- The Bank of Japan has surpassed the country's Government Pension Investment Fund as the largest holder of Japanese equities for the first time.

Japan's central bank held about 46.56 trillion yen ($442 billion) in Japanese exchange-traded funds as of the end of December, Nomura Securities estimates. GPIF held about 45.27 trillion yen worth of domestic shares that month, the fund said Friday.

The investment milestone shows how large the BOJ's ETF-buying program, meant as a way to rekindle inflation, has grown, and it raises questions about the bank's exposure to stock market downturns.

GPIF, known as a "whale" for its huge presence in Japan's financial markets, sets a 25% portfolio allocation target for Japanese equities. Its weighting in this segment stood at 25.28% in December.

During the October-December quarter, the GPIF sold an estimated 879.5 billion yen worth of domestic equities on a net basis, said Masahiro Nishikawa at Nomura Securities. "It has adopted the strategy of selling shares during rallies and buying the dips."

The Bank of Japan made more in stock dividends than in bond interest during the first half of fiscal 2020.   © Reuters

The Japanese central bank, having long embraced an ultraloose monetary policy in its quest to attain a stable 2% inflation rate, aims to buy at least 6 trillion yen worth of ETFs a year, with a ceiling set at 12 trillion yen. Because the BOJ is not expected to sell these shares, given its policy aims, its lead in holdings appears likely to grow.

The central bank's mounting ETF holdings have produced a surge in dividend income. The BOJ earned 675.9 billion yen in dividends during the first half of fiscal 2020, outstripping for the first time the interest from Japanese government bonds, which totaled 552.4 billion yen.

The BOJ sets aside part of these surplus gains for a reserve fund as well as for paying dividends, while the rest goes into the national treasury. If share prices fall sharply, the bank must book impairment charges on its ETF holdings, which could lead to losses. Declining allocations into Japan's treasury also would undercut revenue for the country's budget.

The break-even point for the bank's ETF holdings is around 21,000 points on the Nikkei Stock Average, BOJ Gov. Haruhiko Kuroda has said. The benchmark closed at 28,779 on Friday, comfortably above that threshold, and the recent bull market has produced 12 trillion yen to 13 trillion yen in unrealized profits for the BOJ.

But Japan's inflation rate remains far below the 2% target. The current framework leaves the central bank little choice but to keep purchasing ETFs every month -- which drives the break-even point higher.

The BOJ looks to present a review of its monetary policy in March. The bank may adopt more flexible tactics, such as not purchasing ETFs during market run-ups.

"To prepare for the financial risks associated with future price movements, the BOJ needs a way hold part of its ETF dividend income as internal reserves," said Ikuko Fueda-Samikawa at the Japan Center for Economic Research.

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