BOJ keeps base money target, expands range of assets it buys

23 Dec 2015 | Author: | No comments yet »

Asian Stocks Drop as BOJ ETF Purchase Plan Disappoints Investors.

After the BoJ offered markets a surprise move to buy more ETFs and extend the duration of the bonds it buys, the Nikkei 225 became the worst performer in Asia on Friday.

Asian stocks fell, after a brief rebound from earlier losses, as a plan by the Bank of Japan to establish a new program to purchase exchange-traded funds disappointed investors.TOKYO: Japan’s central bank surprised markets on Friday with a new programme supporting companies actively investing in the world’s number three economy and tweaking its bond buying, sending the Nikkei stock index on a brief surge. The BOJ said it will spend an additional 300 billion yen ($2.5 billion) for ETF purchases on top of the 3 trillion yen the bank already spends each year. That move appeared to be in response to concerns the BoJ could have trouble buying enough bonds under its 80 trillion yen (US$654 billion) annual asset-buying scheme – which effectively prints money to spur lending. “The market took it as a surprise, but the impact of the measures is unclear,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

The market had initially thought the BoJ would increase its presence in the stock market by launching a new ETF buying program, only to find out from the footnote that it was meant to offset its plans to restart selling its individual stock holdings. Just two days after the US Federal Reserve raised interest rates, the BoJ board voted by a majority of 6-3 to buy government bonds with longer maturities and buy an extra Y300bn a year in equities tied to the JPX-Nikkei 400 index.

The FT’s Robin Harding notes the size of the extra stimulus is modest, but it signals that BoJ governor Haruhiko Kuroda is concerned about the credibility of his programme and wants to spur investment and wage rises. Not only that, it’s intended to offset the market impact as the central bank resumes selling stocks it purchased from financial institutions from April. The BOJ also said it would extend the average maturity of holdings of Japanese government bonds to 7-12 years, and increase the amount of individual Japanese real estate investment trusts it can own. The bank’s stimulus scheme was launched more than two years ago to kick-start the economy and end deflation, the chronic decline in prices that has sapped growth for years. The extra ammunition announced today will be used to support firms “that are proactively making investment in physical and human capital.” As for bonds, the BoJ is trying to drive down longer-term interest rates as the Fed did with its “Operation Twist” in 2011.

The Standard & Poor’s 500 Index ended a three-day advance as a stronger dollar in the wake of the Federal Reserve’s interest-rate increase this week weighed on commodity shares, with crude tumbling below $35 a barrel. It’s easy to see why the market wasn’t terribly inspired by the announcement, but it’s not clear why the unexpected moves actually caused a sell-off. The U.S. rate increase solidifies the Fed’s divergence from other major central banks, with policy makers in Europe and Japan still emphasizing measures to support growth.

In theory, meanwhile, this operational change tends to make the so-called portfolio rebalancing effect more powerful as longer-dated JGBs are primarily held by non-depository financial institutions such as life insurance companies. Following its two-day policy meeting, the BOJ kept its main target for monetary stimulus unchanged, indicating confidence in the economy after data from capital spending to business confidence and unemployment exceeded expectations. Investors appear to be shifting focus back to some of the factors that pressured stocks in recent weeks, such as the effects of the strengthening dollar on commodity prices, like oil. “The implications of further energy price declines are clearly putting the brakes on equities at the moment,” wrote Angus Nicholson, market analyst at brokerage IG, in a note. “A wave of defaults and bankruptcies in the energy sector still looks likely to come, and these concerns are certainly weighing on markets.” The slide in oil refreshes worries that energy firms will have trouble paying their debts, after a rout in the junk-bond market rattled investors in recent days. Brent LCOG6, +0.32% , the global benchmark, hit $37.06 a barrel on ICE Futures Europe, the lowest level since December 2008, before rebounding to rise 16 cents to $37.22 a barrel.

The underlying measure fell 1.5 percent on Thursday, halting its longest winning streak since October, as investors moved past the Fed’s first interest-rate increase in almost a decade and returned their focus on the commodities rout and prospects for global growth. Ultralow interest rates have boosted equity markets in recent years. “It’s a delicate balance” that the Fed faces in the coming months in pacing subsequent interest rate increases, said Andrew Swan, head of Asian equities at BlackRock Inc. Swan said the firm shifted into Asian equities over the past month, expecting investors to move back into riskier assets as worries eased about the first rate increase by the U.S. central bank.

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