Japan’s Topix Three-Day Slump Hasn’t Prompted BOJ to Step In

The Bank of Japan, which has helped to prop up the country’s equity market for over a decade, refrained from buying stock funds this week despite the Topix index posting its biggest three-day loss since June. That’s left some investors a little baffled.

When local shares were trading at multi-year highs earlier in 2021, the central bank scrapped an annual 6 trillion yen ($54.8 billion) target for purchases of exchange-traded funds, highlighting instead that it would prefer to buy “during times of heightened market instability.”

Yet the central bank didn’t buy stock funds in the three days through Thursday despite sizable market drops, and has bought only once since the start of April, when the changes it made to its stock-buying program came into effect.

Asked at a parliamentary committee meeting on Thursday why the BOJ had not bought not despite the declines, Governor Haruhiko Kuroda was equivocal.

“We’re not making purchases under any automatic rules, we just look at the state and movements of the market and make a practical decision,” Kuroda said. “It could have an unforeseen impact on the market to say that in a certain situation we will take a certain action.”

Kuroda said that the bank would continue to make “bold” ETF purchases as necessary. But the central bank’s absence is forcing some to reevaluate their expectations.

Japan’s Topix Three-Day Slump Hasn’t Prompted BOJ to Step In

“It’s going to be negative for equities in the near term,” said Hajime Sakai, chief fund manager at Mito Securities Co. “It seems like it’s better not to bet on BOJ ETF purchases.”

Sakai is among those who say they’re unsure of what the current trigger is for the BOJ to buy ETFs. While the central bank has never made those conditions explicit, a decline in the Topix of 0.5% during the morning session was at one point seen to trigger purchases. Sakai said he was unsure if the current trigger is a 2% decline, or a two-day drop of a certain extent.

With the BOJ buying ETFs on April 21, when the Topix fell 2.2% in the morning, but not on May 11 when the index slid just shy of that, a 2% drop might seem like a candidate. But declines of that magnitude are rare, with Topix falling that much in the morning only twice in the past 12 months.

The pain is all the sharper for the Nikkei 225, with the BOJ ending its purchases of ETFs tracking the index in April. The gauge lost 7% in the three days through Thursday, giving up almost all its 2021 gains. Stocks rebounded on Friday, with the Nikkei adding 1.6% and the Topix 1.3%.

Read more: BOJ’s Snub of Nikkei 225 May Spell Pain for Venerable Gauge

As the rebound suggests, the long-term impact of the BOJ’s absence may not be so dramatic. Some doubt how impactful the decade-long buying program has been in the first place.

“I think the evidence is that, their buying has done very little,” said Nicholas Smith, a strategist at CLSA Securities Japan Co.

Sakai argues that over the long term, the market will get used to the new normal. “From a medium to long term perspective, it’s not something to worry too much about,” he said.

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