Bank of Japan drops huge stock purchasing target, holds rates

Japan’s central bank signalled its move away from its huge monetary stimulus policy on Friday, dropping its massive annual target for stock purchases.

The Bank of Japan first announced an annual JPY 6trn target for purchasing exchange-traded funds in 2016, maintaining it every year since, adding a much higher ceiling of up to JPY 12trn in March 2020 as the Covid-19 pandemic unfolded.

It confirmed on Friday that it was removing the JPY 6trn target, but said the JPY 12trn limit - which was initially said to be a temporary response to the coronavirus crisis - would remain in place even after the pandemic quieted.

As at 1 March, the central bank held more than $450bn in stocks, according to the NLI Research Institute, which made it the largest single shareholder on the Tokyo bourse.

The move comes after a stellar year for stocks in Japan even amid the Covid-19 crisis, with the Nikkei Stock Average trading near a 30-year high recently.

A number of critics had been calling out the central bank’s stock purchasing programme in recent months, with the massive size of its holding said to be interfering with the market’s independence.

“The BoJ said it would no longer commit to buying exchange-traded funds at an annual pace of JPY 6trn, instead saying it would only purchase these assets when necessary,” explained Markets.com chief market analyst Neil Wilson.

At the same time on Friday, the Bank of Japan made some minor tweaks to its interest rate policies, standing pat on its short-term rate at -0.1% as it stared down a long road towards its inflation target of 2%.

It also put its Japanese government bond targets in writing for the first time, saying the 10-year yield could move freely within 0.25% either side of its 0% target.

That compared with previous guidance for movements of 0.2% around the bank’s target, which was only ever given verbally.

“Both [the stock purchasing and yield target] moves are attempts to give the central bank more flexibility, and make its stimulus more sustainable in the wake of the pandemic as it tries to stimulate inflation,” Neil Wilson said.

“February core CPI inflation fell 0.4% year-on-year, signalling a decline in the rate annual declines in consumer prices for the second straight month, as rising fuel costs offset the drop in household spending.”