A Potential Funding Source for Government Initiatives?

A Potential Funding Source for Government Initiatives?

A Potential Source of Revenue?

Bank of Japan Governor Kazuo Ueda has stated that the central bank has no immediate plans to sell its vast holdings of exchange-traded funds (ETFs). However, these holdings are drawing increasing attention as a potential source of revenue to fund government initiatives.

Ueda acknowledged the need to decide on the future of the ETF holdings, including the possibility of selling them. This statement comes amidst growing debate about how the BOJ should manage the legacy of its aggressive monetary easing policies, which have resulted in a significantly expanded balance sheet.

The BOJ ended its negative interest rate policy and other stimulus measures in March 2023. This included the framework for purchasing risky assets like ETFs, which had been in place since 2010. However, the central bank has yet to formulate a plan for offloading its substantial holdings of ETFs and government bonds, partly due to concerns about potential market instability.

The BOJ currently holds approximately 37 trillion yen ($237 billion) worth of ETFs. Private estimates suggest that the market value of these holdings reached roughly 67 trillion yen as of January 2023, implying potential latent profits of around 30 trillion yen.

With the BOJ shifting towards monetary policy normalization, various proposals have emerged regarding the utilization of these ETF holdings. Japan's main opposition party has suggested using the dividends from these holdings to fund childcare expenses. Additionally, a private-sector member of a government panel has proposed establishing a special fund to purchase the BOJ's ETFs in exchange for perpetual bonds.

Currently, the BOJ channels its profits, including ETF dividends, to the government. However, the government has not yet outlined any specific plans for the future use of these ETF holdings.

Former BOJ executive Kazuo Momma emphasizes that the BOJ's sole decision-making power lies in whether or not to sell its ETF holdings. The government, however, holds the authority to determine how the proceeds from such sales would be utilized. Momma further highlights the significant hurdle in deciding the fate of the ETF holdings without a clear plan from the government.