BOJ likely to hint at skipping of ETF buys

Bloomberg

The Bank of Japan’s (BOJ) upcoming policy assessment is likely to signal a pause in the bank’s buying of exchange-traded funds (ETFs) as long as stocks stay buoyant, according to a key author of the BOJ’s ramped up asset-purchase plan to fight the pandemic.
“The BOJ is likely to make a more comprehensive judgment on the amount and frequency of its purchases that considers the level and trend of the stock market,” said former BOJ executive director Eiji Maeda, who led the central bank’s crisis
response before stepping down in May.
The BOJ last month announced a policy assessment set to finish in March that many analysts expect will result in a more flexible stance on its stock fund purchases.
The bank in November became the biggest single owner of Japanese equities and criticism is mounting that it is needlessly propping up a stock market trading around a 30-year high, while complicating any future normalization of policy.
There’s little need for the bank to buy ETFs when stock prices are so frothy, according to Maeda. The bank, he said in an interview this week, should allow itself the flexibility to buy the assets at an annualized pace of just 1 trillion yen (about $10 billion) in some months, while ramping up to 10 times that pace in others.
In March last year, when markets were plunging, Maeda led the BOJ to expand the purchases by setting a 12 trillion yen annual ceiling on them that is twice the bank’s target. While a need to help stabilise markets was clearcut then, the resurgence in stocks suggests far less necessity now.
In a possible sign that the BOJ is already taking recent strength in equity markets into account, it bought 50 billion yen of ETFs as part of its main program on Jan. 4, the smallest of its sporadic forays into the market since 2016.
The central bank matched that amount Friday for its second round of additional buying this month. The Nikkei 225 stock index fell 0.6% during the day, after reaching its highest level since 1990 on Thursday.
Maeda said supporting Japan’s economic recovery is also likely to be on the BOJ’s assessment agenda.
One creative step the BOJ could consider is paying interest to banks that lend to projects aimed at helping the economy become greener or more digitalized, said Maeda, who is now president of Chibagin Research Institute.
Still, he sees less than a 50% chance that the BOJ will start buying green bonds in March, given the ongoing global debate over whether central banks should help specific sectors.
Maeda also said Japan’s widening state of emergency over the coronavirus wouldn’t lead the BOJ to bolster its monetary stimulus.
“Fiscal policy plays the leading role in addressing the impact of Covid, with monetary policy in a supporting role,” he said. “The current yield curve control framework and asset purchases should be sufficient to do that.”