What happens when the Bank of Japan owns everything?

As part of its “stimulus” programme, the Bank of Japan has taken a huge stake in Japanese companies. That's bad for both businesses and democracy, says Merryn Somerset Webb.


Haruhiko Kuroda, governor of the Bank of Japan - overstepping the democratic mark

The world is slowly getting more mad than we could possibly have imagined eight years ago (and regular readers will know we have pretty crazy imaginations at MoneyWeek).

Look at Japan, where the private sector is slowly turning into a massive public sector. The Bank of Japan (BOJ) has long been known to be the major holder of Japanese Government Bonds (JGBs). But since it started its turbocharged money printing programmes it has also become a huge holder of the nation's equities (if you print money you have to buy something with it ).

As a note from Halkin Services points out, the BOJ is now a top ten shareholder in about 90% of the Nikkei 225 Stock Average. As a result of its massive purchases of exchange traded funds (ETFs), it holds more than half of the entire Japanese ETF market.

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It now owns more Japanese blue chips "than either BlackRock, the world's largest money manager, or Vanguard Group", with about 9% of Fast Retailing, the operator of Uniqlo stores, and nearly 5% of soy sauce maker Kikkoman Corp, for example. And there is more coming.

The governor of the BOJ reckons that its presence isn't yet "too big". Goldman Sachs reckons that the BOJ could accelerate its spending from the current level of 3.3trn to 10trn or so. That, says Halkin, could make it the number one shareholder in about 40 of the Nikkei's 225 companies by the end of next year.

The Bank isn't ending up with much in the way of smaller companies it uses large cap ETFs so it doesn't yet control a large percentage of the overall market capitalisation of Japan (it still holds under 2% overall). But this still matters.

Read my interview with Mervyn King in this week's magazine and you will see that he worries hugely about central banks overstepping the democratic mark: their managers aren't elected, so they have to be very careful not to do anything that works as fiscal policy (redistributes resources, or affects asset allocation). My guess is that he would think Japan has done that.

It is hard to imagine the BOJ ever selling this volume of equity back into the market, so we have to now see it as a long-term and committed holder of Japanese equities. Buying ETFs rather than stocks prevents the BOJ from becoming directly involved in the governance of individual Japanese companies, but it still gives it a say on overall governance. And as Halkin says, "even targeting funds that favour particular types of firms may drag the central bank into small-scale decisions about resource allocation." See how financial crises erode democracy? It doesn't take long.

All this also begs a question that John Stepek asked me that I can't answer what happens when the Bank of Japan owns everything in Japan? Answers below please.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.