The Bank of Japan's exchange-traded fund purchases under quantitative and qualitative easing with Yield Curve Control

This chapter highlights exchange-traded funds (ETF) purchases conducted by the Bank of Japan under Quantitative and Qualitative Monetary Easing with Yield Curve Control. The policy to purchase stocks indirectly is unprecedented in terms of both scale and duration among major central banks. The purpose of this policy is to promote portfolio re-balancing among individuals, in addition to achieving the 2% price-stability target. While stock prices have more than doubled, individuals have remained largely risk-averse, and foreign investors have increasingly dominated the stock market. Moreover, the BoJ has become one of the largest (silent) investors, with the growing impact on stock prices through the reduction of the downside risk and the possible overvaluing of some small-cap listed firms. Given that achieving 2% inflation is a distant future prospect, the BoJ may find it necessary to unwind the policy gradually by purchasing ETFs only when the stock market is under severe stress, and thereby reduce the annual pace of ETF purchases from about ¥6 trillion. This view is in line with the BoJ’s adjustments announced in July 2018 on introducing flexibility and changing the composition of ETF purchases. Whether the BoJ will be able to take a clearer, more decisive step remains to be seen, however.