The Bank of Japan is considering extending further support to the stock market, which has suffered major sell-offs amid the coronavirus outbreak, according to sources close to the matter.
The central bank is planning to increase its purchases of exchange-traded funds by lifting the annual target of ¥6 trillion ($57 billion) as part of its radical monetary easing program.
But Tokyo stocks continued to fall in trading Wednesday, with the Nikkei ending at a roughly 15-month low, as investors were disappointed by a lack of details on a U.S. economic stimulus promised by President Donald Trump to alleviate the fallout from the coronavirus.
The 225-issue Nikkei average ended down 451.06 points, or 2.27 percent, from Tuesday at 19,416.06, its lowest close since Dec. 26, 2018.
In recent years, the BOJ has stepped in to underpin the market when share prices fall sharply with large ETF buying, market participants say. But its dominance in the ETF sector, with around ¥29 trillion in holdings, has already led to criticism that the bank is distorting the market.
The BOJ will hold a policy meeting March 18 and 19 to discuss the possibility of increasing its ETF purchases, which would be the bank’s first decision on additional monetary easing in more than three years.
The BOJ, which has failed for years to hit its 2 percent inflation target, also has an option of lowering short-term interest rates further into negative territory. But given the adverse impact on commercial banks’ earnings from the ultralow rate, currently at minus 0.1 percent, analysts see the expansion of ETF buying as the more likely option.
The widespread view is that the BOJ would be forced into additional easing at the upcoming meeting, following an emergency rate cut last week by the U.S. Federal Reserve that led to an unwanted surge in the yen against the dollar and other major currencies.
The coronavirus outbreak, which originated in China, has cast a shadow over the global economic outlook, prompting investors to flee to the perceived safety of the yen and, in turn, weighing on shares of Japanese exporters, the main engine of the country’s economy.
While the Fed is expected to discuss further rate cuts at its two-day meeting from March 17, investors have also priced in a rate cut by the European Central Bank at its meeting Thursday in response to the viral outbreak, a decision that could add to pressure on the BOJ to follow suit.
BOJ Gov. Haruhiko Kuroda pledged last week that the central bank will make every effort to ensure stability in financial markets.
Issuing a rare emergency statement, Kuroda said the BOJ “will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”
The BOJ introduced the ETF buying in 2010 as part of its asset purchase program. Under Kuroda, who took office in March 2013, the bank almost immediately raised the annual purchasing goal to ¥1 trillion.
It then raised the target to ¥3 trillion in 2014 and to the current ¥6 trillion in 2016, fueling market concerns that the massive holdings could cause unrealized losses when share prices tank, hurting the BOJ’s balance sheet.
On Tuesday, Kuroda told a parliamentary committee session the central bank’s exchange-traded fund holdings are in the red when the Nikkei stock average is below around the 19,500-point line.
“This figure is based on a rough calculation,” Kuroda said after the Nikkei briefly fell below the 19,000 line in the morning amid market jitters over the coronavirus’ spread.
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