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Stocks

Bank of Japan's ETF purchases raise liquidity concerns

TOKYO -- The Bank of Japan's massive purchases of exchange-traded funds, part of its monetary easing program, could be contributing to sharp stock price swings by draining liquidity from the market.

     The Nikkei Stock Average closed slightly higher Tuesday. Selling prevailed in the morning on weakness in U.S. and European stocks the previous day, but the benchmark index trimmed its losses in the afternoon and moved into positive territory shortly before the closing bell.

     After the Nikkei average briefly dropped more than 150 points to fall below 19,500, many market players were certain the BOJ would step in. And after trading closed, the central bank said it had bought 36.1 billion yen ($297 million) in ETFs. These developments signal a growing sense of dependence on the BOJ.

     This mindset is understandable. The bank in October announced plans for further monetary easing that included tripling its ETF buys to 3 trillion yen a year. The BOJ has intensified the size and pace of its purchases.

     The bank has bought ETFs 32 times so far in 2015. This translates to about once per 2.7 days, compared with 4.3 days in 2013 before the easing began and 11.3 days in 2012 under former Gov. Masaaki Shirakawa. The average amount per purchase also roughly doubled to around 35 billion yen this year from just over 17 billion yen in 2014.

     To put the BOJ's moves into perspective, if a new stock fund raised 35 billion yen, it would be the talk of the market. The central bank is making such purchases once every three days.

     Moreover, a normal fund eventually would shift to profit-taking depending on stock prices. But the BOJ probably will hang onto its purchased ETFs until the 2% inflation target is achieved, steadily siphoning them from the market.

     Though the ETF-buying program had altered the balance by reducing supply, market players are noticing side effects.

     Lately, "orders for some stocks have fallen, so it's gotten harder to complete trades," observed Kyoya Okazawa at BNP Paribas Securities (Japan).

     Fanuc offers one example. The issue's volatility relative to the Nikkei average on a 25-day moving average basis bottomed out around spring 2013 and has been on an uptrend since. Coincidentally, the BOJ announced its unprecedented easing program in April 2013. The central bank's ETF purchases may have reduced liquidity, leading to sharper price movements.

     Fanuc's 1.27% climb Tuesday was well above the Nikkei average's 0.02% increase. Its recent price movements probably have been influenced by growing momentum fueled by the company's plans to boost shareholder returns.

     During the BOJ's policy board meeting April 7-8, one board member said the benefits of easing have been "exceeded by its side effects." This likely referred to the bond market rather than indicating a widespread acknowledgment of increasingly volatile share prices. Regardless, the side effects of the central bank's buying program could come in for more debate.

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