TOKYO -- The Bank of Japan will overtake a state-run pension fund as the top shareholder in Tokyo-listed companies as early as 2020, Nikkei calculations show, as concerns rise regarding the central bank's outsize role in the nation's capital market.
The BOJ held over 28 trillion yen ($250 billion) in exchange-traded funds as of the end of March -- 4.7% of the total market capitalization of the first section of the Tokyo Stock Exchange.
Assuming that the bank maintains its current target of 6 trillion yen in new purchases a year, its holdings would expand to about 40 trillion yen by the end of November 2020. This would place it above the Government Pension Investment Fund's TSE first-section holdings of more than 6%.
The BOJ has likely also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings. It was among the top 10 for 49.7% of all Tokyo-listed enterprises at the end of March.
Japan's capital market used to be characterized by a complex web of cross-shareholdings, with banks and insurers playing the leading role over retail investors. This was followed by a period when foreign investors rapidly expanded their presence. Now, the BOJ is ushering in a new age for the Japanese market.
The central bank is snapping up stocks to keep the market stable and raise inflation toward its 2% goal. "We will support forward-looking economic activity by companies and households," BOJ Gov. Haruhiko Kuroda told lawmakers Tuesday.
High stock prices do have a significant positive effect on the economy, encouraging investment and lifting public sentiment. But significant side effects could come from having the BOJ, which is not an investor simply chasing high returns, as the top player in the equities market.
The bank's ETF program "is eroding market discipline as companies are rewarded simply for being in major market indexes, rather than for having new business strategies or offering more dividends," the Organization for Economic Cooperation and Development said in a country survey published Monday, citing a previous Nikkei report.
"We can try to motivate employees through stock-based compensation, but that's not much of an incentive to do better when we know share prices likely won't fall because of the BOJ's purchases," an executive said.
A drop in share prices, which would squeeze the central bank's capital, could also erode confidence in the yen. "If the Nikkei Stock Average falls below about 18,000, the market value of the ETF holdings would fall below their book value," according to Deputy Gov. Masayoshi Amamiya.
And unlike bonds, ETFs lack maturities. The bank will have to sell them back to the market if it decides to decrease its holdings -- but slowly and carefully to keep from driving prices down.