The Bank of Japan’s purchases of exchange-traded funds are distorting the market, Japan Exchange Group Inc. Chief Executive Officer Akira Kiyota said. BOJ Governor Kuroda’s program of spending 6 trillion yen ($54 billion) a year on the funds artificially depresses volatility, which keeps people from trading, said Kiyota, who was previously more supportive of the policy.

“It’s not good in the long run,” Kiyota said in an interview in Tokyo last week. “If you keep buying 6 trillion yen a year, that means constant distortion.”

While Kiyota’s views aren’t unusual, what’s strange is that he expressed them in public. Officials in Japan rarely speak negatively about other arms of the establishment. It’s the latest sign that the tide is turning against the ETF buying, after Bloomberg News reported that some people at the BOJ were said to be concerned about the program’s sustainability. The chairman of the Japanese Bankers Association has also said there are issues with the size of the central bank’s ETF holdings.

The central bank has been buying ETFs since 2010, but has been increasing its purchases as part of a package of unprecedented stimulus under Kuroda aimed at revitalizing the economy, virtually doubling its annual buying target to 6 trillion yen in July 2016. The BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June, according to a Bloomberg analysis of data from the central bank and Japan’s Investment Trusts Association. That’s equivalent to about 2.5 percent of Japanese stock market capitalization.

Decision Day

Kuroda and his board kept monetary policy, including the ETF program, unchanged after winding up a two-day meeting Thursday. All 43 economists who responded to a Bloomberg survey had forecast that the BOJ would stand pat.

Back in September, Kiyota had no problem with the purchases. Given the Japanese equity market’s market capitalization of around 500 trillion yen, the BOJ’s holdings weren’t enough to distort the overall market, he said at the time. While continued purchases were likely to have an effect eventually, the exchange head said he assumed that the BOJ was fully aware of that possibility and dealing with it.

A gauge tracking volatility on the Nikkei 225 has been hovering near 12-year lows, hitting the least since July 2005 on Friday. Kiyota points to how the value of shares changing hands on the first section of the Tokyo Stock Exchange fell below 2 trillion yen on some days last quarter, even as he acknowledged the BOJ buying “supports” stock prices.

“The stock index levels themselves might be good, but Japan’s cash market isn’t really active,” Kiyota said. “When volatility decreases, trading volume also shrinks.”

The BOJ’s massive buying power already prompted exchange officials to lobby the central bank last year to change the way it acquires ETFs, so that it doesn’t disproportionately purchase stocks in the Nikkei 225, Kiyota said.

Topix-Linked

Under its rules, the central bank previously bought the designated ETFs in proportion to their market value. In September the BOJ shifted its program so that it purchased more funds linked to the broader Topix index rather than the price-weighted Nikkei 225 Stock Average, following JPX’s lobbying.

The BOJ’s choice of ETFs has left it with big slices of some companies, raising questions about how it’ll eventually offload those stakes.

The central bank held about 13 percent of Uniqlo stores operator Fast Retailing Co. as of March, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. NLI Research Institute has forecast that the BOJ could own almost three quarters of the free-floating shares of Fast Retailing, the most heavily weighted company on the Nikkei 225, by March of next year, and almost all of them within three years.

The BOJ is the overwhelming majority owner of the domestic ETF market, even though its share of the stock market overall remains limited. As of July 18, the central bank’s cumulative purchases of ETFs totaled about 14.8 trillion yen, calculations by Bloomberg show.

“The BOJ buying ETFs during the market’s infancy is welcome,” Kiyota said. But “ETFs need to be able to grow as a market by themselves, without the BOJ’s help.”