TOKYO—The year 2019 marks the 20th year since the Japanese central bank adopted its zero interest rate monetary policy. The bank is coming under growing pressure of exiting the policy to eventually return to normal rate environment, calls that are understandable given growing pains experienced by all stakeholders concerned, most notably depositors and lenders.
The next two years is going to be the last window of opportunity for the Bank of Japan to take action, namely selling its huge ETF holdings acquired over the past 9 years to bolster the Japanese stock market.
Inaction by the fall of 2020, when the Tokyo Olympic games ended and its economic stimulation begins to phase out, would be painful to say the least. The yen might lose its value against the U.S. dollar and even the euro (if it’s still around in the current structure); even large Japanese banks would be forced to take more overt action than they are taking now, such as closing branches and cutting manpower, and smaller banks may declare insolvency; and pension funds would be forced to reduce payments to recipients.
The BOJ is continuing to purchase publicly-listed Japanese ETFs. Its ETF holding as of Jan. 15, 2019 stood at 23.7 trillion yen ($219 billion), or about 4 percent of TSE aggregate market capitalization. In 2018, the BOJ purchased 6 trillion yen worth of ETFs, a record amount since the central bank began the extraordinary – many called it ‘unethical’ – operations in 2010.
The BOJ ETF balance sheet currently looks reasonably healthy, not surprising given that it began purchases when the Nikkei stock average was much lower than now. The caveat is that if it sells its ETF holdings in lump, the market could dive sharply and the BOJ ETF portfolio also could take a cold bath.
But the BOJ must begin unloading its ETFs over the next two years or sooner as a phase to restore the normal interest rate environment, which for Japan is 2.5-3.0 short-term rates for the bank’s monetary policy maneuvering room, like the Federal Reserve ideally needs to keep the Fed funds rate around 5.0 percent. Normalization also is vital for commercial banks to regain the traditional lending spread – the cost of borrowing and lending – at 300 basis points or so.
The BOJ’s failure to act promptly would threaten the viability of regional Japanese banks, especially those that were founded after World War II and thus their lending base is not as strong as older banks. Already, some of them are merging and downsizing to reduce costs.
–Toshio Aritake
(Please email comments to: aritake@biglobe.jp )