Ideas emerge for alternative ways to unload Bank of Japan's huge ETF holdings

TOKYO, Nov 20 (Reuters) - Increased scrutiny over the Bank of Japan’s decade-old programme to buy exchange-traded funds (ETF) has given rise to some alternative ideas on how to unwind the bank’s massive holdings, including a proposal to sell them to households.

With its holdings exceeding 30 trillion yen ($289 billion), the BOJ’s ETF buying has recently come under increased criticism for distorting market pricing and exposing its balance sheet to potential losses.

Since ETFs do not have maturity, they do not fall off the BOJ’s balance sheet unless the central bank sells them. Selling ETFS to the market, however, is considered a highly unlikely option due to the danger of triggering a massive stock sell-off.

Shigeki Kushida, a former BOJ executive who oversaw monetary policy drafting, proposed selling the BOJ’s ETF holdings to the general public instead of to the market.

The BOJ could attach incentives to encourage households to hold onto the ETFs for a certain period of time, rather than sell them off to markets, he wrote in a recent article in a magazine issued by the Securities Analysts Association of Japan.

“It’s undesirable for the BOJ to remain a major investor and shareholder of Japan’s stock market for a long time,” he wrote.

There is little chance the idea will materialise in the near future. BOJ Governor Haruhiko Kuroda has repeatedly said he had no plan to tweak the bank’s ETF buying any time soon.

But the proposal comes at a time when concerns are rising over the BOJ’s accumulating risky asset holdings, as COVID-19 diminishes the chance of an early exit from ultra-loose policy.

BOJ policymaker Takako Masai, for one, called for the need to make the bank’s ETF buying more flexible.

Former BOJ executive Kazuo Momma estimates it will take about 200 years to unload all of the BOJ’s ETF holdings if it sells them at a pace that does not jolt markets.

“The BOJ’s ETF buying started out as an emergency step. It’s not something central banks should be doing in the first place,” he told Reuters.

“At the very least, the BOJ should stop buying ETFs except for when market sentiment sours enough to inflict severe damage to the economy.”

$1 = 103.7600 yen Reporting by Leika Kihara; Editing by Simon Cameron-Moore