Japan’s Topix Three-Day Slump Hasn’t Prompted BOJ to Step In

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Japan’s Topix Three-Day Slump Hasn’t Prompted BOJ to Step In

Gearoid Reidy and Min Jeong Lee
·3 min read

(Bloomberg) -- Japan’s Topix index just posted its biggest three-day loss since June last year. Yet the Bank of Japan, which has for over a decade helped to prop up the country’s stock market, seems unmoved, leaving investors a little baffled.

When local shares were trading at multi-year highs earlier in 2021, the central bank scrapped an annual 6 trillion yen ($54.8 billion) target for purchases of exchange-traded funds, highlighting instead that it would prefer to buy “during times of heightened market instability.”

Yet the central bank didn’t buy stock funds in the past three days despite sizable market drops, and has bought only once since the start of April, when the changes it made to its stock-buying program came into effect.

“It’s going to be negative for equities in the near term,” said Hajime Sakai, chief fund manager at Mito Securities Co. “It seems like it’s better not to bet on BOJ ETF purchases.”

Sakai is among those who say they’re unsure of what the current trigger is for the BOJ to buy ETFs. While the central bank has never made those conditions explicit, a decline in the Topix of 0.5% during the morning session was at one point seen to trigger purchases. Sakai said he was unsure if the current trigger is a 2% decline, or a two-day drop of a certain extent.

With the BOJ buying ETFs on April 21, when the Topix fell 2.2% in the morning, but not on May 11 when the index slid just shy of that, a 2% drop might seem like a candidate. But declines of that magnitude are rare, with Topix falling that much in the morning only twice in the past 12 months.

Asked at a parliamentary committee meeting on Thursday why the BOJ had not bought not despite the declines, Governor Haruhiko Kuroda was equivocal.

“We’re not making purchases under any automatic rules, we just look at the state and movements of the market and make a practical decision,” Kuroda said. “It could have an unforeseen impact on the market to say that in a certain situation we will take a certain action.”

The pain is all the sharper for the Nikkei 225, with the BOJ ending its purchases of ETFs tracking the index in April. The gauge has lost 7% in the last three days, giving up almost all its 2021 gains.

The Nikkei fell 2.5% on Thursday, compared to the 1.5% drop in the broader Topix, with a 7.8% drop in SoftBank Group Corp., which makes up nearly 7% of the measure, dragging the bluechip gauge lower.

Read more: BOJ’s Snub of Nikkei 225 May Spell Pain for Venerable Gauge

“The market will gradually get used to this new stance of BOJ’s on ETF purchases,” said Sakai. “From a medium to long term perspective, it’s not something to worry too much about.”

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