Bank of Japan Losses Exceed $281 Million From Buying ETFs as Stocks Slump

By Lynn Thomasson and Yoshiaki Nohara - Nov 1, 2011 1:45 PM GMT+0700

The Bank of Japan has lost as much as 22.4 billion yen ($281.7 million) purchasing exchange-traded funds as the Topix Index approaches a 27-year low.

The central bank’s stock holdings have fallen about 4 percent since buying began on Dec. 15, 2010, according to estimates calculated by Bloomberg using government filings. Losses climbed above 67.6 billion yen in September as equities plunged amid concern Europe’s debt crisis would trigger a global recession, the data show.

The purchases are part of a 20 trillion yen BOJ plan to stimulate economic growth and boost investor confidence by buying securities, such as government debt, commercial paper and real estate investment trusts. The central bank expanded the program last week by 5 trillion yen after the country’s currency reached a postwar record against the dollar, threatening the export-led economy.

“This is not what a central bank should be doing,” said Masaaki Kanno, the Bank of Japan’s former chief foreign-exchange dealer and now chief Japan economist at JPMorgan Chase & Co., referring to the ETF purchases. “The program started in an emergency, and it’s been snowballing.”

The ETFs aren’t likely to hurt the central bank’s finances and the BOJ may take action should losses increase, said a spokeswoman, who declined to be named, citing bank policy. While the central bank hasn’t provided details on the performance of its ETF holdings, Bloomberg News estimated the loss by calculating the return if it spent all the money on Nomura Holdings Inc.’s Nikkei 225 ETF or the Topix ETF, the biggest Japan funds that trade on exchanges.

Topix, Nikkei ETFs

The central bank said in a statement on Nov. 5, 2010, that it would buy ETFs that track the Topix or Nikkei 225 (NKY) Stock Average and target the volume-weighted average price. The Nikkei 225 entered a bear market seven months ago and the Topix of 1,663 Japanese companies is about 9 percent away from erasing its advance since March 12, 2009.

The Nikkei 225 posted the biggest decline in a month, falling 1.7 percent to 8,835.52 today. The index has declined 14 percent this year.

It’s too early to tell if the BOJ’s program has been a success or failure because the purchases haven’t finished yet, said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd. in Tokyo. She predicts the investments will eventually be profitable as shares recover from “extremely depressed valuations.”

‘Tolerate Losses’

The Topix trades at 0.92 times book value, a measure of corporate assets minus liabilities, near the lowest level since March 2009, according to data compiled by Bloomberg. The index is valued at 16.7 times reported profit, 5.7 percent less than the median multiple from the past five years.

“They should be able to tolerate losses during a bad period for the stock market,” said Fink. “But if they’re in the red in a couple years, then you can safely say, ‘Well, that facility wasn’t very useful.’”

This isn’t the first time the central bank has bought stocks. The BOJ in October 2002 purchased shares that financial firms owned in other companies to stem losses at banks after the Topix plunged 52 percent from a peak in February 2000. The BOJ’s investment foreshadowed a rally in the Topix, which bottomed in March 2003 and more than doubled over the next four years.

More ETF Buying

The BOJ’S ETF purchases accelerated this year after concern over Europe’s sovereign-debt crisis triggered a global equity rout and sent the Nikkei Stock Average Volatility Index on Aug. 9 to the highest level since the aftermath of Japan’s March 11 earthquake and tsunami. The central bank spent 403.5 billion yen on ETF shares tracking the Nikkei 225 or Topix since August, compared with 340.4 billion yen in the previous eight months, filings show.

The purchases, which are listed on the BOJ’s website, have taken place when Japanese stocks declined and have signaled better performance the next day. The Nikkei 225 fell an average of 1.9 percent on days when the BOJ bought, slipping 0.1 percent the following day, data compiled by Bloomberg show.

The investments represent a small part of Japan’s ETF market. The central bank spent 17.3 billion yen buying shares on Oct. 18, less than 1.5 percent of the total value traded in either Nomura’s Nikkei 225 or Topix ETFs, according to data compiled by Bloomberg.

“Given circumstances back then, the BOJ didn’t have a choice but to do this program in order to lift sentiment,” said Tetsuya Inoue, a former BOJ official who is now chief researcher for financial markets for Nomura Research Institute Ltd. in Tokyo. “Maybe they didn’t expect these assets to drop this much.”

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net