Is it true that the Bank of Japan has purchased a large amount of stocks? What would happen if they stopped buying?

Okay, let's talk about the Bank of Japan buying stocks. It's definitely an interesting topic, and I'll try to explain it in plain language.

Yes, the BOJ is Indeed a Major Buyer in the Stock Market

Yes, what you've heard is absolutely true. Over the past decade or so, the Bank of Japan (BOJ) has indeed spent real money to buy massive amounts of Japanese stocks.

However, they don't buy like individual investors, picking up some Sony today and some Toyota tomorrow. They buy stocks indirectly by purchasing a financial product called ETFs (exchange-traded funds).

An analogy: Think of an ETF as a "stock gift basket." This basket contains shares from a bunch of major Japanese companies (like the 225 companies in the Nikkei 225 Index), packaged together in specific proportions. When the BOJ buys this "gift basket" directly from the market, it's effectively buying shares in all those companies at once, according to those proportions.

Why Do They Do This?

This brings us to a chronic problem in the Japanese economy – deflation.

Simply put, prices keep falling, leading people to think "things will be cheaper tomorrow," so they don't spend or invest today and just save their money. As a result, businesses see no revenue, employees get no raises, and the economy stagnates like a pool of stagnant water. This situation has persisted in Japan for twenty to thirty years, dubbed the "Lost Decades."

To revive the economy, the BOJ has tried everything, one of which is quantitative easing (QE), essentially "printing money to flood the market." They hoped that injecting massive amounts of money would achieve several goals:

Lower interest rates: Making it easier and cheaper for businesses and individuals to borrow money, encouraging investment and consumption.
Boost confidence: By stepping into the stock market itself, the BOJ effectively puts a floor under stock prices, signaling "Don't worry, I've got your back," thereby boosting investor confidence.
Create a wealth effect: Rising stock prices make households and businesses holding stocks feel wealthier, making them more willing to spend.

Buying ETFs is a very direct, even somewhat "blunt," way to achieve these goals. Through persistent buying, the BOJ inadvertently became the largest holder in the Japanese stock market, acting as the "invisible major shareholder" in many household-name companies.

So, What Happens If They Stop Buying?

That's hitting the nail on the head. If a long-standing "big spender" who only buys and never sells, with immense purchasing power, suddenly stops playing, the market will definitely react. It's like taking the training wheels off a bicycle that's long depended on them. What happens then?

The main impacts would likely be:

1. Direct Impact on the Stock Market: The Biggest Buyer Exits

The "Floor" Disappears: In the past, whenever the market fell, there was an expectation that "the BOJ will probably step in soon." This expectation itself acted as a stabilizer. If the BOJ announces it will stop buying, this "safety net" vanishes. In the short term, the market might become jittery due to the loss of its biggest buyer, leading to falling prices or increased volatility.
Supply and Demand Shift: Previously, demand (BOJ buying) exceeded supply. Now, with this massive source of demand gone, buying pressure weakens, potentially making the market more prone to declines.

2. Impact on Market Confidence: A Signal of Policy Shift

The BOJ stopping stock purchases is a very strong policy signal. How the market interprets this signal is crucial.

Positive Interpretation: The BOJ believes the Japanese economy is now healthy enough and no longer needs such "strong medicine." Deflation has been overcome, corporate profitability has improved, and the economy can run on its own. If this is the case, it would be good for the stock market in the long run.
Negative Interpretation: Investors might feel "the good times are over," signaling the end of the era of cheap money. Concerns would arise: Can the stock market stay at high levels without the BOJ as a major buyer? This fear could trigger selling.

3. Impact on the Economy and Businesses: Rising Funding Costs

Stopping ETF purchases is usually the first step towards monetary policy normalization. The next step is likely interest rate hikes.

Borrowing Gets More Expensive: Once rates rise, interest costs for corporate loans and personal mortgages will increase. This could dampen corporate investment and expansion, and also affect consumer spending.
Zombie Companies May Fail: Many "zombie companies" – businesses that should have failed but survived on cheap loans in the ultra-low interest rate environment – might finally collapse. This would cause short-term economic pain but, in the long run, help clear the market.

4. Impact on the BOJ Itself: Handling the "Hot Potato"

Stopping purchases is just the first step. The harder part is that the BOJ still holds ETFs worth tens of trillions of yen. What happens to these stocks?

Sell Them? If they start selling, the impact on the market would be enormous, akin to a "tsunami." They absolutely wouldn't dare to sell large amounts easily.
Hold Them Permanently? This isn't realistic either. The BOJ isn't an investment company; holding vast amounts of stocks long-term distorts the market and poses huge financial risks for itself.
Sell Slowly? This might be the only option. But figuring out how to sell, when to sell, and to whom, without crashing the market, is a world-class challenge.

To Summarize

Think of it this way:

The BOJ buying stocks is like a doctor giving continuous blood transfusions and stimulants to a patient (the Japanese economy) who has been critically ill for years.

The benefit: It kept the patient alive and even made them look a bit healthier (stock market rise, improved economic data).
Now, if they stop buying (stop the medication/reduce transfusions):
- Best case scenario: The patient has regained the ability to produce their own blood and can recover slowly on their own. There might be some weakness initially (short-term market decline), but it's a necessary step towards health.
- Worst case scenario: The patient's health was just an illusion, propped up entirely by the medication. Once stopped, the condition could deteriorate rapidly (market crash, economy plunging back into trouble).

Currently, the BOJ announced in March 2024 that it would stop new ETF purchases, officially taking the first step in "removing the training wheels." The entire market is holding its breath, watching to see whether the Japanese economy, like this bicycle, will ride smoothly forward or wobble and fall without its supports. This is undoubtedly one of the biggest dramas to watch in the global financial markets in the coming years.