I concluded Part 3 by saying that having the government (or a state-owned special purpose entity) acquire the BOJ’s ETF holdings and hold them indefinitely would be a win-win for both markets and the BOJ. However, this option has a drawback. Namely, government ownership of liquid ETFs in perpetuity is unlikely to be politically feasible given the government’s current fiscal condition.

Government-owned ETFs would be a type of state-owned property. In the ongoing fiscal rehabilitation debate, the consensus is that state-owned property should be liquidated to the extent possible, with the proceeds used to pay down the national debt. However, state-owned property varies widely from fixed assets to financial assets. Opinions differ on which assets are liquidatable.

That said, there is unlikely to be much if any dispute that government-owned ETFs could be readily liquidated. A clear consensus would likely coalesce around the view that the ETFs should immediately be sold. From the public’s standpoint, any further increase in social insurance premiums, the consumption tax or any other tax would be out of the question as long as the government was holding liquid financial assets with a market value of ¥50tn. The government would accordingly face pressure to sell the ETFs in connection with its fiscal rehabilitation narrative.

Incidentally, existing state-owned property includes ¥7.6tn of public equities (Japan Post, NTT and JT shares). The government is required by law to maintain ownership of some ¥7.4tn of its ¥7.6tn public equity holdings. The ¥200bn immediately salable portion of its public equities is dwarfed by the ¥50tn of ETFs.

If the government is going to be caught in a dilemma between pressure to liquidate the BOJ’s ETF holdings and concerns about the market impact of doing so, it understandably may not want to purchase ETFs from the BOJ, especially since the National Treasury’s cash flows would be little changed irrespective of whether the government purchases the ETFs. By “cash flows,” I mean dividend distributions payable to the ETFs’ owner. If the ETFs were acquired by the government (or a government-owned repository), these dividend distributions would flow into the Treasury. If the ETFs remain under the BOJ’s ownership, the BOJ would recognize the dividend distributions as income, which is remitted to the government after deduction of expenses and reserve accruals. In other words, the amount received by the Treasury would differ depending on whether the dividends flow into the Treasury directly or via the BOJ’s income statement, but they would end up in the Treasury either way.

To reiterate, if the amount of money that will flow into the Treasury is more or less the same in either case, the government is presumably loath to acquire the ETFs from the BOJ because it wants to avoid being pressured to liquidate the ETFs when doing so would upend the equity market’s supply-demand balance. It likely prefers to have the BOJ retain ownership of the ETFs and continue to remit the dividend income to the Treasury. While such an outcome seems likely from the standpoint of the government’s incentives, is not the only option. I will propose an alternative in Part 5. (To be continued)

• Katsutoshi Takehana

  Group Manager

  Financial Market & Digital Business Research Department