The Bank of Japan may need to consider ways to offload its huge holdings of exchange-traded funds (ETFs), such as selling them to households, former central bank policymaker Makoto Sakurai said.
But the timing will be years away, as the Japanese economy could take until 2024 to fully recover from the scars of the coronavirus pandemic, forcing the BOJ to maintain its massive stimulus measures beyond Governor Haruhiko Kuroda’s tenure. ending in April 2023, he said.
“The current stimulus won’t last forever. The BOJ has to think about (how to get out) at some point. But it won’t be until 2024 or 2025,” Sakurai told Reuters in an interview Monday.
“The BOJ will have to stick to the current framework for the remainder of Kuroda’s tenure, as the Japanese economy will not recover as quickly,” said Sakurai, who during his five-year tenure on the board , was considered one of Kuroda’s closest associates.
Under the control of the yield curve (YCC), the BOJ guides short-term interest rates to -0.1% and 10-year bond yields around 0%. He also buys huge amounts of government bonds and risky assets like ETFs to inject money into the economy.
Before stepping down in March, Sakurai took part in the BOJ’s decision this month to make YCC sustainable enough to withstand a prolonged battle to revive inflation.
NO NEW STEP NECESSARY ON DORMING YIELDS
The March review allowed the BOJ to maintain YCC for several more years by allowing it to maintain an ultra-loose policy without expanding its balance sheet too much, Sakurai said.
One of the steps was to ditch a numerical target on the pace of buying ETFs and make it clear that this would allow 10-year yields to move 50 basis points around its 0% target in the hope of revive a dormant bond market.
Despite these measures, the volume of transactions in the Japanese bond market hit an almost two-decade low in May. Nonetheless, Sakurai said it was “too early” to take further steps to revitalize the market, arguing that more time is needed to see if Japanese yields move in response to external developments.
After reducing bond and ETF purchases, the BOJ must also find ways to offload its ETF holdings, Sakurai added.
BOJ’s ETF holdings have swelled to around 50 trillion yen ($ 454 billion), making it the largest holder of Japanese equities and drawing heat for exposing its balance sheet to excessive market risk .
One option would be to sell ETFs to households through a third-party system, Sakurai said.
“This is something the BOJ has to consider at some point,” Sakurai said as he removed ETFs from its balance sheet.
“Ideally, this would be a framework that facilitates the management of household assets in an aging society and does not create losses for stakeholders, including the BOJ,” Sakurai said.
Sakurai, who voted for Kuroda’s proposals throughout his time at the BOJ, said the two had frequent one-on-one exchanges on issues ranging from economic theory to history.
($ 1 = 110,1000 yen)
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