March 25, 2020 / 2:01 PM / 10 days ago

Breakingviews - Bank of Japan gives lesson in perils of ETF buying

Bank of Japan Governor Haruhiko Kuroda attends a news conference in Tokyo, Japan, January 21, 2020.

LONDON (Reuters Breakingviews) - The Bank of Japan has been an unhappy trailblazer in central banking. What happens to a central bank that has been buying equity exchange-traded funds since 2013 will fascinate peers who are resorting to ever more extreme measures to dig their economies out of a coronavirus-created hole. Among those particularly interested may be Federal Reserve Chairman Jerome Powell, who this week announced plans to buy ETFs that track high-grade U.S. corporate bonds.

The Japanese central bank on Tuesday acknowledged unrealised losses of 2 trillion yen-3 trillion yen ($18 billion-$27 billion) on its holdings of ETFs following a sharp slump in Japanese stock prices. True, the country’s benchmark Nikkei 225 stock index leapt 8% on Wednesday, its biggest daily gain since 2008, and may manage to claw back more ground. But even without this rebound, the unrealised deficit would not be a total disaster.

Even if losses exceeded the profit that the BOJ will make from interest payments on the central bank’s massive bond holdings, Governor Haruhiko Kuroda has reserves he can tap. These should be large enough to cover any losses that may show up when the central bank values the securities, as it is required to do at the end of the fiscal year and first half of every fiscal year. Second, even if the ETF losses were to keep growing, the government can step in to boost the central bank’s capital.

That’s fine in theory. But in practice, mounting losses would most likely provoke political and public criticism. And if the government ends up backstopping the central bank, there may be political pressure on rate-setters to change their approach. Even if politicians refrained from publicly attacking Kuroda, investors would have nagging doubts about how immune the central bank was to political interference.

These may seem minor inconveniences at a time when policymakers are trying to save economies from a massive, sustained crash. Given rates are near or below zero in advanced countries and central banks are already buying vast amounts of government debt, there will be a growing openness about the range of monetary policy measures that can be deployed. The head of the Slovak central bank, Peter Kazimir, said on Tuesday that the European Central Bank might one day buy ETFs as part of its stimulus programme. If the ECB ever considers such buying, Kuroda’s experiences and difficulties will be worth poring over.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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