BoJ loss on ETFs likely topped $520mn, may hinder increase

TOKYO: The Bank of Japan probably incurred a latent loss of over 40 billion yen ($520 million) on its holdings of exchange-traded funds (ETFs) at the end of September, with the growing loss potentially limiting the scope for any further increases in its purchase target.

The central bank's ETF buying, launched last year, has lent some support to the stock market with players acknowledging that whenever the TOPIX index is down at least 1 pct in the morning session, the BoJ is typically a buyer in the afternoon.

The BoJ purchases ETFs that are linked to the TOPIX and the Nikkei average through a third party without disclosing specific names of issues.

The ETFs the BoJ purchased until the end of September, totalling well over 600 billion yen, would have latent losses of at least 40 billion yen based on Reuters' calculations tracking moves in both the Nikkei and TOPIX, due to stock market slides.

That would be much bigger than the 2.1 billion yen in unrealised loss at the end of March.

The central bank has boosted its target for ETF purchases to 1.4 trillion yen from its initial 450 billion yen, through monetary policy easing in March and August in the wake of a devastating March earthquake and the yen's jump to record highs.

But the BoJ is concerned about the impact of stock price volatility on its financial health. At its Oct. 27 monetary policy meeting, the bank's staff told the policy board to be careful about additional purchases of ETFs in view of price volatility and its impact on the bank, noting that there may not be such strong constraints for buying of government and corporate bonds, minutes showed on Monday.

At the meeting, the BoJ decided to boost an asset purchase scheme solely through an increase in Japanese government buying (JGBs), bringing the total amount available for asset purchases to 20 trillion yen. It has pledged to plough the whole amount into markets by the end of 2012.

The BoJ will give the actual valuation of its asset holdings when it provides its financial statement for the April-September fiscal first half later this month.

The BoJ, in principle, would not offload its ETF holdings even in the face of latent losses but would set aside reserves to cover them. Bigger losses mean the BoJ would set aside more from its surplus as reserves, thereby reducing its contribution to state coffers.