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.

160505-bank-of-japan

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.

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.

Recommended

The top funds to invest in
Funds

The top funds to invest in

As market volatility and recessionary fears continue, here are the most popular funds, stocks and trusts investors are putting their money into accord…
2 Feb 2023
Cheap and cheerful or reassuringly expensive?
Sponsored

Cheap and cheerful or reassuringly expensive?

Many investors aim to pick up “cheap” shares. But cheap does not always mean good value, says Max King. Quality comes at a price.
21 Dec 2022
Profit from patience
Advertisement Feature

Profit from patience

Smart investors will reap the rewards by staying focused on the long-term, research from Alliance Trust shows.
9 Dec 2022
Share tips of the week – 9 December
Share tips

Share tips of the week – 9 December

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
9 Dec 2022

Most Popular

Best savings accounts – February 2023
Savings

Best savings accounts – February 2023

Interest rates on cash savings are making a comeback. We look at the best savings accounts on the market now
3 Feb 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

Interest rates are now at 4%, and they could rise further in the months ahead.
3 Feb 2023
NS&I brings back one-year fixed bonds with highest rates since 2010
Personal finance

NS&I brings back one-year fixed bonds with highest rates since 2010

NS&I’s one-year fixed bonds are back on sale after being pulled off the market in 2019 - but is the rate any good?
1 Feb 2023