Traders puzzled over BoJ’s ETF-lending plan


“The BoJ’s share in the ETF market has been considerably increasing, so the BoJ would want to show the central bank is dealing with it somehow with this ETF lending facility,” said, Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd in Tokyo.

“The BoJ’s share in the ETF market has been considerably increasing, so the BoJ would want to show the central bank is dealing with it somehow with this ETF lending facility,” said, Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd in Tokyo.

TOKYO: The Bank of Japan (BoJ) says it may introduce a lending facility for its exchange-traded fund (ETF) buying programme, which would allow it to temporarily lend ETFs to market participants.

The nebulous one-sentence line on the last page of its latest statement on monetary policy left some traders puzzled, while others speculated on whether this could be a way to allay concerns surrounding liquidity.

“The BoJ’s share in the ETF market has been considerably increasing, so the BoJ would want to show the central bank is dealing with it somehow with this ETF lending facility,” said, Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd in Tokyo.

“With this step, the BoJ would be appealing that it would provide liquidity to the market.”

Assuming Shigemi’s analysis holds – and governor Haruhiko Kuroda may shed more light at a press briefing later that the move would mark another attempt to make the BoJ’s stimulus programmes more sustainable.

The central bank has previously scaled back its government-bond purchases, and widened its tolerance band for 10-year yields, in an effort to address declining trading volumes.

Not everyone is as positive on the BoJ’s move.

“Sounds like a ‘grand old Duke of York’ move to me: buying ETFs to lift the market then lend ETFs to short sellers to march it down again,” said Nicholas Smith, a strategist at CLSA Ltd.

“Unfortunately, there is pretty clear evidence that their ETF buying is merely serving to damage the price discovery machinery of the market, driving away investors, particularly foreign ones. I’m sure they have the best of intentions, but they’re hemlock to the market, as they were to the bond market.”

With the BoJ’s ETF holdings totaling 29 trillion yen (US$259bil) as of September at market value, the central bank owns 77% of the nation’s ETF market.

Analysts have called on the BoJ to adjust its ETF purchase programme by increasing assets linked to the broader Topix index, and shifting away from those linked to the Nikkei 225 Stock Average, to help ease distortions in Nikkei 225 stocks such as Fast Retailing Co that are heavily weighted in the blue-chip gauge.

The BoJ has changed the allocation of its ETF buying twice since it began the programme in 2010.

In July, its purchases of Topix-linked funds increased, while the weighting for the Nikkei 225 fell.

Last year, the central bank bought a record 6.5 trillion yen of ETFs tracking the nation’s shares, topping its annual target of about six trillion yen.

“Maybe they are doing it to help improve liquidity of Nikkei 225 stocks,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte in Singapore.

“That’s the only thing I can think of. But lending ETFs out would suggest that there are borrowers who want to short the index, maybe. I really don’t know.” — Bloomberg