The BOJ Is Collecting Tens Of Billions In Dividends From ETFs It Owns

By Hideyuki Sano, Bloomberg markets live reporter and strategist

Amid all the scrutiny on the massive amount of debt the Bank of Japan owns, the new governor’s stance toward the 48 trillion yen ($364 billion) of stocks it holds is coming into focus too. Those shares, held through ETFs, have acted as an overhang in the market amid speculation that Kazuo Ueda will embark on policy normalization.

The ETFs, which had unrealized gains of 11 trillion yen in the six months to September, may stay his hand though by acting as a hedge against potential losses from bonds, says Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Also at play is the rich dividends the holdings provide, almost quadrupling to more than 1 trillion yen through September from the same period five years earlier, according to the BOJ’s earnings reports.

Japanese stocks are hardly expensive either. The Topix index is trading at 12.7 times earnings, about one standard deviation below its average over the past 10 years. That compares with 18.3 times for the S&P 500.

“The income from ETFs has become a pillar for the BOJ, substituting paltry incomes from JGBs with low coupons,” said Sayuri Kawamura, chief economist at think tank Japan Research Institute. “But that’s possible only when stock prices are firm,” she said. “If share prices tumble, the BOJ could suffer losses.”

Deputy Governor Shinichi Uchida said last month that the BOJ’s unrealized losses on bonds would reach 50 trillion yen if the 10-year yield rises to 2%, from 0.46% currently. On paper, the BOJ’s losses on JGBs amount to 875 billion yen, the latest reports show.

Japan’s inflation reached a 41-year high of 4.2% earlier this year, a particularly pertinent problem for the central bank, which owns half the country’s sovereign notes.

The BOJ’s mission isn’t to maximize its own profit though, and it isn’t the only central bank whose portfolio is suffering. But many analysts think it would want to avoid the embarrassment of gigantic losses which may undermine confidence, draw public criticism of its policy and ultimately limit the central bank’s flexibility.

“The BOJ will need to take its portfolio management more seriously to a certain degree now,” said Hiromichi Shirakawa, a former Bank of Japan official who was until recently chief Japan economist at Credit Suisse Group AG. “It makes sense for the BOJ to hold stocks.”