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Markets

Bank of Japan's ETF buying hits yearly record

Purchases top $53bn as central bank tries to calm jittery market

The BOJ now has an outsize presence in the Tokyo stock market.

TOKYO -- The Bank of Japan has bought a record 6 trillion yen ($52.9 billion) in exchange-traded funds so far this year, providing support to a market pummeled by investors concerned about the U.S.-China trade war and an economic slowdown.

The BOJ scooped up 71.5 billion yen in ETFs on Thursday. That lifted its total from January to 6.06 trillion yen, surpassing the previous annual high of 5.9 trillion yen, set in 2017.

But the central bank's dominating presence in the market also means that unloading its holdings, whenever it might try to do so, would be challenging.

The bank stepped up the purchases after the summer as the stock market frequently took a beating from jittery investors. The benchmark Nikkei Stock Average slid nearly 2,200 points in October, spurring the central bank to step in with purchases totaling 870 billion yen, a monthly record.

The BOJ tweaked its monetary policy in July, saying it "might increase or decrease the amount of [ETF] purchases depending on market conditions." The statement led to speculation that the central bank might start downsizing its buying program, but it took the opposite course.

The BOJ remains one of the few major buyers of Japanese stocks following the exodus of foreign investors. Having driven a rally through 2017, overseas investors lost their appetite for Tokyo shares; their net selling has reached 4.5 trillion yen so far this year. Yet the market remains robust thanks to the central bank's buying, with the Nikkei index climbing to a 27-year high of 24,270 in October.

Some investors welcome the BOJ's policy as its counterparts in the U.S. and Europe wrap up monetary easing. "We feel comfortable buying Japanese shares because they're propped up by the BOJ," said an executive at a European asset management company.

Others worry, however, that the central bank's unprecedented purchases will make investors complacent about market volatility. They also warn that its targeting of certain stocks, such as the constituents of Tokyo Stock Exchange's Topix index, undermines healthy price formation.

Unlike government bonds, which must be redeemed at maturity, ETFs purchased by the BOJ will remain on the bank's balance sheet until they are sold. But given the likely impact of unloading on the market, the bank essentially cannot sell the shares even if it wants to during a market downturn.

For a long time, the BOJ held on to stocks that it bought from private-sector banks during the 2000s to help them clean up their bad loans, and it started to unload them only in 2016. Given that the ETF balance at the central bank is now more than 10 times the total of those stocks, it would take even longer to scale back that section of the portfolio.

The BOJ began buying ETFs in 2010 to encourage jittery investors to come back to the stock market after shares had plummeted the year earlier. The Nikkei index was stuck around 10,000 following its plunge to the post-bubble low of 7,054 in 2009.

While the bank thereafter boosted its purchases gradually, it revved up the program in 2016 after Britain's Brexit referendum sent shockwaves through the markets. In July of that year, it decided to nearly double its purchase target to 6 trillion yen from the previous 3.3 trillion yen.

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