How Japan Rigs Its Stock Market: BOJ Plus State Pension Fund Now Owns 37 Trillion Yen Of Equities

By Nikkei

TOKYO -- The Bank of Japan is emerging as the nation's second-largest stock investor, with its portfolio topping 10 trillion yen ($82.7 billion) in market value this month.

When it launched quantitative and qualitative easing back in April 2013, the BOJ decided to purchase an annual 1 trillion yen in exchange-traded funds linked to Japanese equities. Last October's additional easing boosted this to 3 trillion yen.

The central bank's portfolio has a book value of around 5.7 trillion yen. But soaring share prices have lifted its market value past the 10 trillion yen mark -- nearly 2% of the tally for all Tokyo Stock Exchange shares.

The figure makes the BOJ second only to the Government Pension Investment Fund, whose portfolio boasted a market value of 27 trillion yen as of December's end.

Although the central bank does not disclose details of share-buying operations, it frequently steps into the market and buys 30 billion yen to 40 billion yen worth of stocks when equity prices falter in the morning. Its purchases Tuesday reached 35.2 billion yen, underpinning a market that showed signs of a morning struggle. The bank has carried out 20 such operations so far this year.

"The BOJ's role of providing support to the market is giving investors a sense of security," says Junichi Makino of SMBC Nikko Securities.

Stock rallies help the economy. The market value of listed shares owned by the nation's households exceeds 100 trillion yen, compared with 76 trillion yen two years ago. This stimulates spending by the wealthy in particular. The environment is also conducive to companies increasing capital or pursuing mergers and acquisitions. Soaring equities bolster consumer sentiment or the economic outlook, paving the way for an escape from deflation.

The stock portfolio's impact on the BOJ's financial health can no longer be ignored. The bank's net worth is 2.8 trillion yen, while its stock portfolio is worth twice that in book value, or 250% more in market value. Japanese megabank Mitsubishi UFJ Financial Group has a net worth of 14 trillion yen, with its stock portfolio amounting to only 5 trillion yen in market value.

The central bank must book losses when stock prices suffer extraordinarily sharp drops, since its financial health could hurt confidence in the Japanese currency.

"There is ample room for us to buy more shares, but we must keep a vigilant eye on price fluctuation risk," a senior BOJ official says.

Under its easy-money policy, the central bank has also been expanding its portfolio of Japanese government bonds by 80 trillion yen a year. Its JGBs are now valued at 260 trillion yen, roughly double the figure two years ago.

As risk assets increase, the BOJ is reinforcing its financial base. The central bank is required by law to set aside 5% of net income for its capital base and channel the rest into the government's coffers. In fiscal 2013, the government let the BOJ raise the ratio to 20% of income, or 144.8 billion yen.

The question now is whether the capital base can expand as quickly as risk assets. If Japan has trouble exiting from deflation, and if monetary easing remains in place for the long haul, the central bank could face tougher financial constraints and have little room for policy steps.

Big player in Tokyo market: BOJ's stock portfolio swells to 10 trillion yen- Nikkei Asian Review.

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