BOJ Should Avoid ETF Buys Fueling Stock Bubble, Ex-Official Says
A pedestrian walks past the Bank of Japan headquarters at dusk in Tokyo. (Photographer: Kiyoshi Ota/Bloomberg)

BOJ Should Avoid ETF Buys Fueling Stock Bubble, Ex-Official Says

A three-decade high for Japan’s soaring stocks is adding to pressure on the Bank of Japan to tweak its buying of exchange-traded funds, according to the former head of its financial markets department.

“Shares could be rising on a bubble and the BOJ could be helping inflate that bubble,” Hiromi Yamaoka said in an interview Monday, the same day the Nikkei 225 Stock Average topped 30,000 for the first time since 1990. “The bank will be held responsible if it continues to buy ETFs without making any changes.”

BOJ Should Avoid ETF Buys Fueling Stock Bubble, Ex-Official Says

The former official in charge of the BOJ’s asset-buying operations made the remarks ahead of a policy review into the effectiveness and flexibility of the central bank’s easing program, including its ETF purchases.

In the review, set for March 18-19, the BOJ will likely try to give a clearer signal that it won’t buy stocks when levels are high, while emphasizing its readiness to jump into the market when needed, Yamaoka said.

That view largely matches the market consensus. But his flagging of concern over a possible bubble suggests the bank may be looking to hold back on buying ETFs by more than is currently expected.

“The BOJ must be looking for a soft landing for its ETF purchases by choosing a moment when the market is on firm footing like now,” Yamaoka said.

The return to Nikkei stock levels not seen since the bursting of a late 1980s asset bubble has fueled doubts about the BOJ’s need to support prices through its ETF purchases. The central bank is already the largest single owner of Japanese shares after a decade of buying.

While Governor Haruhiko Kuroda insists the purchases are an essential part of the BOJ’s stimulus efforts toward its distant price goal, the purchases continue to draw additional criticism for unnecessarily boosting prices and indirectly constraining efforts to improve corporate governance.

“The BOJ is buying ETFs when stocks are on a super-fast rising trend,” Yamaoka said. “It may be hard to explain why if policy gets reviewed again sometime in the future.”

Yamaoka warned that any potential changes to the ETF buying strategy in the review will be subject to change until their announcement. If market sentiment dramatically worsens, the BOJ may need to alter its messaging at the last minute, he said.

Yamaoka also said:
  • BOJ is likely to keep its 12 trillion yen ($114 billion) ceiling and 6 trillion yen annual target at the review
  • Central bank doesn’t share the strong interest in better returns that individuals have so its ownership of shares could be indirectly lowering scrutiny on corporate governance
  • BOJ should really consider changing its policy framework after failing to reach the inflation target for years
  • Widening the trading band around 10-year bond yields to generate more volatility contradicts the purpose of yield-curve control
  • Still, if the bank wants to do that, now would be a relatively safe time to do it as the bond market isn’t expecting yields to shoot beyond 0.3%.

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