Bank of Japan Expected to Become Largest Shareholder in Japan's Stock Market This Year... "Massive ETF Purchases"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The Bank of Japan (BOJ) is expected to become the largest shareholder in the Japanese stock market by valuation within this year. Due to the impact of the novel coronavirus disease (COVID-19), the BOJ has been purchasing a large amount of exchange-traded funds (ETFs), and it is anticipated to surpass the current largest shareholder, the Government Pension Investment Fund (GPIF), becoming the shareholder holding the most shares of listed companies in Japan.

According to the Asahi Shimbun on the 28th, the BOJ announced in its fiscal year 2019 (April 2019 to March 2020) settlement that as of the end of March, its ETF holdings (market value basis) increased by 7.9% year-on-year to 31.2 trillion yen (approximately 358 trillion won). Asahi reported that as of the end of March, the BOJ's ETF holdings accounted for about 5.8% of the market capitalization of companies listed on the First Section of the Tokyo Stock Exchange.

Japanese ETFs are financial products linked to representative indices of the Tokyo Stock Exchange, such as the Nikkei 225 average stock price. When the BOJ purchases ETFs, it effectively buys multiple stocks included in these funds, making the BOJ an indirect shareholder. Accordingly, Asahi cited estimates from the Nissay Basic Research Institute that the number of listed companies in which the BOJ holds more than 10% of shares through ETFs increased to 56 as of March, up 19 from 37 in the previous year.

The current largest shareholder in the Japanese stock market is the GPIF, which currently holds 42.4 trillion yen. Given that the BOJ has significantly increased its ETF purchases to support the stock market, which plummeted due to COVID-19, the gap in holdings between the GPIF and the BOJ is expected to have narrowed.

In response to the sharp stock price decline caused by COVID-19, the BOJ decided to double its annual ETF purchase target from 6 trillion yen and invested about 1.2 trillion yen in April and over 400 billion yen in May.

However, concerns have been raised about the side effects of the BOJ increasing its ETF investments. Fluctuations in ETF valuation based on market conditions directly affect the BOJ's financial status. This means the BOJ could incur valuation losses and need to set aside reserves. At the fiscal year-end in March last year, the BOJ's ETF valuation gains were about 3.9 trillion yen, but as of the end of March this year, they dropped sharply by 92% to approximately 300 billion yen amid the COVID-19 outbreak.

Asahi pointed out, "The BOJ's ETF purchases may distort stock prices and, by acting as a 'silent' major shareholder who does not exercise shareholder rights, could cause side effects that hinder corporate reforms."