By Leika Kihara and Takahiko Wada
TOKYO (Reuters) - The Bank of Japan is likely to drop its commitment to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen ($57 billion) at its next policy review, former central bank policymaker Sayuri Shirai said on Friday.
The central bank will take the step when it reviews its policy tools in March to make them more sustainable, she said.
The BOJ's massive purchases have drawn much criticism for distorting markets and sources have told Reuters that the central bank will discuss ways to scale back its ETF buying at the March review.
"For the BOJ, the biggest concern is probably its ETF-buying programme," as it exposes the bank's balance sheet to excessive market risk and crowds out private investors, said Shirai, currently a professor at Japan's Keio University.
"The BOJ shouldn't be buying ETFs this much. It probably wants to change its current commitment so it can more easily slow the pace of buying, without giving markets the impression it is tightening monetary policy," she told Reuters on Friday.
The central bank's pledge, which also allows for purchases of up to 12 trillion yen annually, is part of efforts to boost prices towards its 2% inflation target.
The BOJ's huge ETF buying is also "problematic" as it runs counter to Prime Minister Yoshihide Suga's efforts to promote environmental, social and governance (ESG) investment, said Shirai, who is also a senior advisor to Federated Hermes (NYSE:FHI) Equity Ownership Services.
As advisor to the U.K.-based ESG engagement service firm, Shirai meets with Japanese firms to help raise their awareness of ESG issues.
By soaking up liquid stocks and becoming a big shareholder of some firms, the BOJ is making it hard for private shareholders to prod companies to change their behaviour and become more aware of ESG principles, Shirai said.
"ESG investment is among the key pillars of the Suga administration's growth strategy," she said. "The BOJ's ETF buying runs counter to what the government is trying to do."